Hold on rates due to strong jobs data

The labour market will remain strong, bringing further falls in the jobless rate, the Reserve Bank believes.

The Reserve Bank of Australia building in Sydney. Picture: AAP

The labour market will remain strong, bringing further falls in the jobless rate despite the downturn in economic growth in the latter half of last year, the Reserve Bank believes.

Minutes for its March board meeting, released yesterday, show the bank is betting that strong hiring will continue to justify keeping its benchmark cash rate on hold at 1.5 per cent despite financial markets putting their money on further rate cuts this year.

“Given that further progress in reducing unemployment and lifting inflation was a reasonable expectation, members agreed that there was not a strong case for a near-term adjustment in monetary policy,” the minutes said.

The board meeting was held the day before the Australian Bureau of Statistics released the December-quarter national accounts, showing GDP had risen by only 0.2 per cent, down from an already slow 0.3 per cent in the September quarter.

The Reserve Bank was anticipating another weak result, but appeared doubtful about whether the national accounts were reflecting the true state of the economy.

“There continued to be tension between the ongoing improvement in labour market data and the apparent slowing in the momentum of output growth in the second half of 2018,” the minutes said.

The minutes reiterated the economic outlook released after its February meeting, saying “the central forecast scenario was still for growth in GDP of around 3 per cent over 2019 and a further decline in the unemployment rate to 4¾ per cent over the next couple of years.”

They said this reduction in spare capacity in the labour market underpinned the forecast of a gradual pick-up in wage pressures and inflation. This forecast was supported by indicators of future trends in the labour market, such as the number of  job vacancies and surveys of business hiring intentions.

“Given this, members agreed that developments in the labour market were particularly important. Members agreed to continue to assess the outlook carefully,” the minutes said.

The ABS will release its February labour force survey tomorrow. Most market economists expect modest growth in employment and the jobless rate holding at 5.0 per cent, but some are forecasting a decline in employment and a small lift in the jobless rate.

A key concern for the bank is the state of household consumption. “There continued to be considerable uncertainty around the outlook for consumption given the environment of declining housing prices in some cities, low growth in household income and high debt levels,” the minutes said.