Signs point to RBA fine tuning, rather than hike spree
New figures calm fears of tightening in Australia’s labor market; This could prevent the Federal Reserve from returning to a major interest rate hike cycle.
The Australian economy added an estimated 21,000 new jobs in January, while wages rose 0.8 per cent in the quarter, according to Commonwealth Bank data from unidentified wage payments from nearly 400,000 CBA accounts.
CBA data provides an early indication of official Australian Bureau of Statistics figures.
CBA economist Harry Ottley said the sharp fall in unemployment in official figures for December was more noise than signal, although it showed the job market remained in good shape.
ABS figures showed the unemployment rate fell to 4.1 per cent in December; this was well below the RBA’s forecast for the natural, non-inflationary unemployment rate.
If this were indicative of a continuing trend of tightening in the labor market, the central bank could see this as evidence of worsening inflationary pressures.
“But we don’t yet see in the data we have any evidence of a material tightening implied in the (ABS) workforce survey,” Mr Ottley told AAP.
“This gives us confidence that we are still in the fine-tuning phase in terms of monetary policy, rather than the risk of a major (tightening) cycle.”
CBA economists expect the central bank to raise the cash rate once again to 4.1 percent in May.
But from then on, they find that the bank remains on hold and other indicators show that the economy is well balanced.
Consumer confidence fell further on Tuesday; The Westpac-Melbourne Institute consumer sentiment index fell 2.6 percent to 90.5 following the RBA’s interest rate hike a week ago.
Confidence levels have fallen since November, when the index was in positive territory at 103.8, and markets are still relatively bullish on the chances of further rate cuts.
Mr Ottley said the continued strength of the labor market and wage growth would support consumption, while the impact of weakening sentiment, a higher Australian dollar and higher interest rates would slow the economy and bring it back into balance.
A NAB survey published on Tuesday showed business conditions also softened, driven by declines in trading conditions and profitability, while capacity utilization fell by 0.6 percentage points.
AMP economist My Bui said the combination of data suggests the economy is in a roughly balanced position, with business and consumer sentiment softer than usual and capacity utilization slightly tighter than historical averages.
“The consumer sector is still very price conscious, which is evident from the buying intensities during promotional periods; we think the softer sentiment readings indicate some slowdown in discretionary spending ahead, as well as a moderation in underlying inflation pressures,” Ms Bui said.
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