RBA must cut rates in November as unemployment hits near four-year high
The Reserve Bank faces an extraordinary dilemma as unemployment hits a near four-year-high while inflation remains sticky, but preserving jobs should now be the priority.
Finally, the Reserve Bank has data to justify more rate cuts.
Governor Michele Bullock and her fellow board members should restart interest rate cuts as soon as next month after the unemployment rate hit a four-year high of 4.5 per cent, well above the 4.3 per cent rate the central bank has forecast all the way out to the end of 2027.
Just a few weeks ago, the RBA warned that recent monthly inflation indicators suggested that inflation in the September quarter may be higher than expected at the time of the August Statement on Monetary Policy.
And its recent downward revision in its medium-term trend productivity growth assumption implies that potential economic growth is slightly lower than previously expected.
But while the quarterly inflation data on October 29 will guide the RBA board as to the appropriate amount of stimulus, it’s likely to conclude that core CPI around the top of its 2-3 per cent target band is consistent with its target in the context of what may be a rapidly weakening labour market.
The US Federal Reserve looks to have come to the same conclusion and is widely expected to cut rates at its October 28-29 meeting and again at its December 9-10 meeting.
Speaking in Washington before the release of the employment data, Bullock said Australia’s services inflation is “a little sticky” and the 4.2 per cent unemployment rate initially recorded for August was “good”. The August jobless rate was revised up to 4.3 per cent.
Bullock said the labour market may be “a bit tight or close to balance”, but overall it was “in a pretty good place” and the broader economy is in a “pretty good spot.”
The RBA will be hoping that the 4.5 per cent unemployment rate is just a “spike”.
However, with the unemployment rate hitting its estimate of the non-inflation accelerating rate, the RBA can no longer describe the labour market as “tight”.
Bullock also said the recent weakness in consumer confidence was “a bit of a puzzle.”
Market pricing on the chance of a November interest rate cut jumped from about 40 per cent to 70 per cent after the employment data. A 25 basis point cut was fully expected by the time of the December meeting, and the market was almost fully pricing two rate cuts by May.
The Australian dollar dived from US65.15c to US64.80c before stabilising. The ASX 200 share index rose as much as 1.3 per cent to a record 9109.7 points before easing to 9062.4.
IG market strategist Tony Sycamore said the RBA and economists had “got it wrong” after hotter than expected inflation reports and the RBA has “no choice but to cut in November.”
“The jobs report suggests downside risks are mounting and the RBA’s forecast of a 4.3 per cent unemployment rate by December 2026 may now face upward pressure,” he said.
“The RBA have noted in recent months that some cooling within the labour force was expected, but nowhere within its most recent forecasts did they project the unemployment rate rising to anywhere near 4.5 per cent – not this year, not next year and not in 2027.”
Last month’s warmer than expected monthly CPI indicator prompted many commentators to conclude that the end of RBA’s easing cycle was nearly complete.
Banks including CBA, NAB, ANZ, JP Morgan, Citi and Deutsche scrapped their previous predictions of further interest rate cuts this year with some saying rate cuts were over.
Subsequent RBA commentary raised the bar for additional cuts even further.
On Thursday, Bullock emphasised that certain aspects of the monthly inflation data for July and August had been “slightly stronger than we anticipated,” while the labour market remained “possibly a bit tight” and “those sorts of things are at the back of our mind.”
“We talked about that coming out of our latest board meeting – that these sorts of things were giving us a little bit of time to think about whether or not there’s more easing to come or not.”
IG’s Sycamore said the RBA now finds itself in a very awkward position.
“As we saw in the US recently, when the labour market starts to crack, sticky inflation quickly becomes yesterday’s problem as central banks move quickly and responsibly to cut rates to bring support to a weakening labour market,” he said.
Goldman Sachs chief economist Andrew Boak said the jobs data add to evidence that labour market conditions have gradually softened this year.
A further decline in the “job-finding rate” – a measure of how quickly unemployed individuals are finding jobs – supports his view that conditions are not currently inflationary.
Mr Boak said an ongoing rebalancing in growth away from the “care economy” risks a further softening in labour market conditions.
Employment in public-orientated sectors of the economy accounted for an “unsustainable” 75 per cent of total employment growth over the past 18 months – despite representing only 30 per cent of overall employment – and jobs growth in the private sector has been “quite subdued.”
“The material rise in the unemployment rate lowers the bar for the RBA to cut the policy rate at November’s meeting, and particularly as Bullock has often cited a commitment to ‘retain the gains in the labour market’,” he added.
Still, he said a cut in November was “contingent on the CPI report not printing strong enough to derail the RBA’s medium term forecasts for on-target inflation.”
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