Jobs market holds key to next Reserve Bank rates call
As fears grow about the impact of the Iran war on the economy, a rise in unemployment in Australia could scare the Reserve Bank from further rate hikes.
The unemployment rate is expected to remain at 4.3 per cent and 20,000 new jobs will be added in April, when the Australian Bureau of Statistics releases the results of its latest Labor Force survey on Thursday.
“A strong result in line with expectations would support the bet that RBA rate hikes will continue in the coming months,” IG market analyst Tony Sycamore said.
“However, a significantly softer outcome, particularly with the unemployment rate approaching 4.5 percent, would cause the interest rate market to dial back expectations for further rate hikes later this year.”
Money markets had priced the odds of a rate hike at the next RBA meeting in June at around one in 10, but by November they had priced in exactly one rate hike.
Minutes of the central bank’s early May meeting, released Tuesday, showed that although risks to economic activity and employment have increased, most board members still agreed that fighting inflation was a priority.
Market economists have also warned that the effects on the labor market will worsen as the Iran war drags on.
This poses a dilemma for the Federal Reserve board, which must balance the dual priorities of keeping price growth in check and aiming for full employment.
The Commonwealth Bank on Wednesday cut its economic growth forecast to 1.6 percent from 1.9 percent by the end of 2026 and raised its peak unemployment forecast to 4.6 percent from 4.4 percent.
“This leaves the RBA facing a difficult trade-off,” CBA economists Belinda Allen, Ashwin Clarke and Harry Ottley said in a research note.
“Inflation was already very hot and will rise even higher from here. It is also likely that growth will slow in the coming months, which will bring demand more in line with supply and gradually reduce price pressures.”
The labor market was still showing resilience in April data published by online job market SEEK.
Job postings increased by 0.2 percent during the month, while advertised salary increases increased by 0.4 percent.
Importantly, job posting growth was broad-based in every state and territory except the ACT, said SEEK chief economist Blair Chapman.
“While this is positive, we should not underestimate the negatives facing Australian businesses,” he said.
“Hiring confidence has understandably diminished as we enter the final months of the financial year, with rising inflation and fuel costs adding to business and cost-of-living pressures.”
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