Budget 2024: Rate hopes surge as unemployment jumps to 4.1pc

The chance of a rate cut by the end of this year has jumped to 50 per cent, according to financial markets, after jobs figures showed a surprise jump in the unemployment rate to 4.1 per cent in April.

The jobs market has stayed resilient through 13 interest rate hikes and a rapid slowdown in economic growth. Picture: Luis Enrique Ascu i/ NCA NewsWire

There is a 50 per cent chance of an interest-rate cut by the end of the year, according to financial traders, who have upgraded their outlook for mortgage holders after the unemployment rate surprisingly surged above 4 per cent.

The reassessment from financial markets comes as Energy Minister Chris Bowen admitted that providing $300 in power bill relief to every household was a deliberate attempt to buy a lower inflation outcome and put pressure on the Reserve Bank to cut interest rates.

The unemployment rate lifted to 4.1 per cent, from an upwardly revised 3.9 per cent in March, ­despite a 38,500 lift in the number of jobs in April, new figures from the Australian Bureau of Statistics showed.

The unemployment rise ­reversed a trend of data in the first quarter of the year that boosted fears inflation was likely to stay higher for longer.

RBA governor Michele Bullock last week put interest rate rises back on the agenda, while economists and markets expected mortgage relief to be delayed until as late as mid-next year.

Upbeat inflation figures in the US on Wednesday night, however, alongside the new jobs data, drove a sharp reassessment among traders on the path of ­interest rates, with financial markets pricing in a 50 per cent chance of a rate cut by December, from 5 per cent the day before, ­according to NAB.

With the government under pressure over its big-spending budget, Mr Bowen contradicted Jim Chalmers’ reason for giving electricity bill subsidies to all households – including those of mining magnates Gina Rinehart and Andrew Forrest – rather than means-testing the measure.

The Treasurer has claimed the decision to give power bill relief to all Australians was because targeting the measures was “too costly” and difficult to administer – a view backed on Thursday by the gas and electricity retailers ­industry body, the Australian Energy Council.

Mr Bowen, however, provided an alternative reason, saying “it’s the way you maximise the impact on inflation, which will help the Reserve Bank in their job”.

“And we’ve designed this very carefully as to how it will maximise assistance to the Reserve Bank to ensure that they can do their job and then fiscal policy and monetary policy are working hand-in-hand,” Mr Bowen told ABC radio.

“You do that by spreading it across as many bills as you can, and you do that effectively by spreading it to every energy bill in the country.”

After holding rates at 4.35 per cent this month, the RBA board in its accompanying statement flagged that the jobs market needed to cool further in order for the country to continue along its ­“narrow path” to bring inflation under control without sinking the economy.

“Conditions in the labour market have eased over the past year, but remain tighter than is consistent with sustained full employment and inflation at target,” the RBA board said.

Deutsche Bank chief economist Phil O’Donaghoe said the jobs numbers showed “clear cracks” in the labour market.

“If that picture is sustained over coming months, we think the upshot for the RBA’s near-term policy deliberations will be more important than anything in the federal budget,” he said.

He added that he expected a rate cut in November.

Tuesday’s budget assumed ­interest rates would not move lower until the middle of 2025, and with cost-of-living pressures still the number one priority among voters, Labor considers a rate cut over the coming year as essential to its re-election strategy.

The Treasurer has said cost-of-living measures in last year’s budget would reduce inflation by 0.75 percentage points in the year to June, while the new energy rebates and the boost to commonwealth rent assistance announced on Tuesday would knock off ­another 0.5 percentage points in 2024-25.

Challenger chief economist Jonathan Kearns, a former senior central bank official, said it was true that the government subsidies “mechanically” lowered measured consumer prices.

“However, these measures add to household incomes, particularly of households that will spend a large share of that additional ­income, and so will contribute to extra spending,” Dr Kearns said.

“Further, temporary cost-of-living relief measures – such as the energy rebate – simply move inflation, pushing it to later years, in particular when the rebate rolls off from July 2025.

“Despite this, through the ­miracle of timing, rounding and some other noise, the budget forecasts don’t show a bounce back in inflation.”

Dr Kearns noted the RBA had made it clear it would “look through” what it saw as only temporary movements in prices, suggesting the central bank’s board would not base interest rate decisions on artificial changes in the cost of power bills or rents.

“If anything, the budget adds to, rather than reducing, the excess of demand relative to supply in the economy which is driving persistent inflation and is of ­concern to the RBA,” he said. “The inflation dragon still lurks in our future.”

Adding to the weaker employment picture painted by Thursday’s ABS figures, April’s jobs growth was solely in part-time employment, which climbed by 44,600 people, offset by a 6100 fall in full-time employment. That left total hours worked broadly unchanged in April, the seasonally adjusted figures showed.

ABS head of labour statistics Bjorn Jarvis said the employment-to-population ratio was steady at 64 per cent, indicating that recent employment growth was broadly keeping pace with population growth.

“This suggests that the labour market remains tight, though less tight than late 2022 and early 2023,” Mr Jarvis said.

The rate of underemployment – which measures those with jobs but who want to work more hours – lifted from 6.5 per cent to 6.6 per cent.

This week’s federal budget forecast unemployment would reach 4 per cent by June, before climbing to 4.5 per cent in mid-2025, despite ongoing jobs growth.