Strong job market dashes hopes of February rate cut

KPMG has warned Australia’s tight labour market is still placing upwards pressure on inflation and the Reserve Bank cannot risk lowering the interest rate later this month.

RBA governor, Michele Bullock. Picture: NewsWire / Jeremy Piper

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KPMG has warned Australia’s tight labour market is placing too much upwards pressure on inflation and the Reserve Bank cannot risk lowering the interest rate this month, which would dash Anthony Albanese’s hopes of a pre-election rate cut.

An analysis by the leading consulting firm has found the strong job market remained at a level where it was still exerting inflationary pressure on the economy, meaning the RBA would be unlikely to deliver a rate cut despite falling inflation.

The Prime Minister has spruiked the latest figures, which revealed headline inflation had fallen to 2.4 per cent, declaring the decline “exceeds the most optimistic of forecasts” and the economy is “heading in the right direction”, as the odds firm for a rate cut before the federal election, due by May 17.

Underlying inflation – which strips out volatile items such as petrol and the impact of energy electricity – in the year to December had fallen to 3.2 per cent.

But despite financial traders putting the chances of a rate cut at the RBA’s February 18 meeting at 96 per cent, KPMG chief economist Brendan Rynne said the strong employment market meant financial loosening could not be “justified”.

“Our analysis indicates that the labour market – one of the two most crucial factors, along with inflation, which the RBA considers in its rate decisions – is not yet at a place to justify monetary loosening,” Dr Rynne said.

The latest unemployment figure sat at 4 per cent, following a surprise dip to 3.9 per cent in November, defying predictions that the labour market would soften this year and reversing a gradual upward trend in joblessness.

The KPMG analysis outlined three possible zones the Australian economy could fall into within an index: a “constrained” zone, where the labour market exerts inflationary pressure; “spare capacity”, where the jobs market exerts downward inflationary pressure, and; a “neutral” status between the two.

The economy finished the December quarter in the constrained zone after it deteriorated following about two years of gradual improvement, the report found. According to the index, the economy has been under inflationary pressure from the labour market since early 2022.

“The gradual easing in the labour market we had started to see has now stalled, with the unemployment rate back at 4 per cent and labour force participation at a record high,” Dr Rynne said.

“While we still expect that easing trend to resume during 2025, the December figure showed the continuing tightness of the market.

“The RBA would ideally want the labour market to be consistently in the neutral zone for a while, and we are currently not in that place.”

Political pundits have speculated that Mr Albanese is preparing to jettison the March budget and hold an election on April 12, if the RBA delivers interest rate relief after a relentless cycle of hikes.

The KPMG report also found that other indicators pointed to the underlying strength of the jobs market, including the steady number of employers actively recruiting and an increase in job vacancies.

“KPMG forecasts that the unemployment rate will end 2025 at 4.2 per cent, assuming a 0.75 per cent reduction in the cash rate this year, highlighting the ongoing tightness in the labour market,” Dr Rynne said.

“While progress has been made in reducing the inflationary pressures from the labour market, it is not clear that interest rates can be cut, without pushing the unemployment rate back into the constrained zone.”