No rush for RBA to cut rates amid strong jobs growth

Those who predicted rate cuts this year are growing ‘uneasy’ as strong jobs growth casts doubt on whether the RBA will be ready to make the call.

We continue to think market odds of an RBA cut this year are somewhat overdone, says RBC Capital Markets chief economist Su-Lin Ong. Picture: Hollie Adams/The Australian

Australia’s strong jobs market could mean there’s little hope of interest rate cuts this year.

A rise in the unemployment rate to 4.2 per cent in July was consistent with the Reserve Bank’s year-end target of 4.3 per cent, but jobs growth of 58,000 beat estimates for a fourth month running. Unemployment rose because the participation rate hit a record 67.1 per cent.

Combined with US recession fears sparked by a weak US non-farm payrolls report early this month, Australia’s slightly lower than expected inflation report last month fuelled speculation that the RBA would start cutting interest rates by the end of the year.

But speculation of rate cuts in Australia and the US has cooled in the past two weeks.

Subsequent US economic data mostly allayed US recession fears even as US inflation data supported the case for the Fed to start cutting rates. In Australia, a strong labour force report pushed back on market pricing of cuts by the RBA this year.

Swaps market pricing continued to project at least one RBA rate cut of 25 basis points by December, a second cut by April and a third cut by May. But this pricing cooled a touch as Australian government bond yields bounced off 14-month lows after the jobs data.

CBA uneasy

CBA still expects the RBA to start cutting rates in November but is “growing uneasy”.

“We still expect the labour market to loosen from here but admit this is taking longer to occur than we had expected, especially on the employment front,” said CBA senior economist, Belinda Allen. Unemployment was “the key metric to watch” and its rise from a 50-year low of 3.5 per cent in the past two years suggested slack was building. Together with slowing wage gains, this could give some “comfort” to the RBA as it battles stubbornly-high inflation, she said.

However, the Australian Bureau of Statistics said that the labour market remained “quite tight”.

“The employment and participation measures remain historically high while unemployment and underemployment measures remain historically low, compared with what we saw before the pandemic,” the ABS said.

Ms Allen said upcoming data on consumer spending data, inflation and the labour market data needed to move in the right ­direction for the RBA to cut in November.

“We still maintain our November start date for the first interest rate cut by the RBA but we are growing uneasy, given the shortening runway to achieve the data configuration needed for the RBA to feel comfortable cutting rates after today’s employment print,” she said.

Since the RBA stopped raising the cash rate last November, employment has grown by an average of 45,000 a month, stronger than when the RBA was lifting rates.

Citi Australia and RBC

“Optically, the unemployment rate is a little closer to the NAIRU (non-accelerating inflation rate of unemployment) mid-point of 4.3 per cent,” said Citi Australia chief economist Josh Williamson.

“But we don’t believe this will result in the RBA re-considering its hawkish policy stance.

“Labour demand remains strong and more people are encouraged to enter the labour force, knowing their chances of finding work are strong.”

The RBA uses a broad range of indicators to assess the underlying state of the jobs market.

RBC Capital Markets said the labour market “while loosening, remains healthy”.

“We doubt it shifts the RBA’s assessment that the labour market still errs slightly tight, consistent with a steady and patient approach to policy settings,” said RBC chief economist Su-Lin Ong.

“Markets reacted by taking out a few basis points worth of RBA cut pricing and widening versus US yields, which we think is the right response.

“We continue to think market odds of an RBA cut this year are somewhat overdone, and we don’t expect a move until next year unlike much of the rest of the developed world.”

NAB said the data showed a tight labour market that was easily absorbing population growth.

The employment to population ratio rose a tenth to 64.3 per cent, near a record high of 64.4 per cent in November 2023. But the labour market is also cooling in terms of wage growth, given the rise in the unemployment rate and Tuesday’s wage price index.

“Of course what matters more for inflation is unit labour costs, and here realised labour productivity is important,” NAB head of market economics Tapas Strickland said.

“If productivity fails to pick up, then that would see unit labour cost growth as being too high to be consistent with target inflation.

“For this reason the RBA is likely to remain cautious on the near-term prospect of rate cuts in the absence of a greater slowing in the economy, which today’s strong employment data does not suggest, or more moderate realised inflation outcomes.

NAB and rate cuts

NAB expects the RBA to start cutting rates next May.

After the RBA’s August board meeting last week, governor Michele Bullock said expectations of interest rate cuts in Australia this year “doesn’t align” with the board’s thinking. Last week she said the RBA “will not hesitate” to lift rates again if needed.

Westpac said the surge in labour force participation rate to a record high suggested that the economy’s underlying capacity might actually be in a healthier state than currently assumed.

“Overall, these results speak to labour market resilience rather than weakness – a welcome signal for policymakers that have been desperately trying to orchestrate a ‘soft landing’ for the economy,” Westpac economist Ryan Wells said.

But ANZ said “robust” jobs growth was “at odds” with market pricing for a 2024 rate cut in Australia. “Overall, we view today’s data as strong and expect the RBA to form a similar conclusion,” ANZ head of Australian economics Adam Boyton said.