RBA governor dismisses jobs fears but hints at rates hold after inflation uptick | Australian economy

The central bank governor dismissed warnings that unemployment was rising and said the labor market “will not fall off a cliff”, hinting that the interest rate would be kept steady.

Michele Bullock said the RBA was surprised by the jump in unemployment and the rise in inflation in September, but stressed that job creation had generally slowed as the RBA had expected.

“Jobs are still being created, but not as many,” Bullock said Monday night.

“We always thought [unemployment] It would drift upward a little. “Maybe it’s drifted a little higher than we thought, but it’s not a huge amount yet.”

Following Bullock’s comments, the probability of a rate cut next Tuesday dropped from 60% to around 10% according to pricing in financial markets, but the probability of a rate cut at the December meeting remained high at 80%.

In recent weeks, the RBA has received two unwelcome and contradictory signals for the September quarter: inflation has come in considerably hotter than expected, while the employment market has cooled further.

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The rise in unemployment to 4.5% has exceeded the RBA’s own forecasts and led to calls for further rate cuts from next week.

Speaking at the Australian Business Economists dinner in Sydney, Bullock said the strength of the labor market had been a highlight of his two-year tenure as governor, but downplayed its weakening as a by-product of slow economic growth.

“This brings the labor market more into balance… We think we’re close,” Bullock said.

“There are still signs that the labor market is a little tight and may not actually fall off the cliff all of a sudden.”

Bullock said he would update his forecasts when the RBA board meets next week to decide whether to focus on inflation or support the slowing employment market, which would mean further interest rate cuts.

Luci Ellis, Westpac’s chief economist and former senior RBA official, said Bullock’s speech showed that future inflation data would determine the outcome of the meeting.

In the Australian Bureau of Statistics’ quarterly report on Wednesday, the consensus among economists is that inflation will jump to 3 percent in September from 2.1 percent in June.

A sharp increase would be a well-predicted consequence of the end of government electricity bill subsidies, which will continue to increase until 2026. Electricity prices could rise more than 9% in the three months to September, leaving prices 24% higher than a year ago, according to investment bank Barrenjoey.

Inflation is expected to accelerate

While Australians will be squeezed at the end of the electricity bill cut, more worrying for the RBA is the acceleration of underlying inflationary pressures.

These are best represented by the bank’s preferred “trimmed average” measure, which eliminates large, one-time movements (such as electricity) and provides the best guidance for interest rate decisions.

The consensus here is that headline inflation in the quarter was 1%, a significant increase from the previous three months.

This would leave the annual rate unchanged at 2.7% and represent a worrying pause in the downward trend that extends to the end of 2022.

Bullock acknowledged on Monday night that such a result would mean a significant departure from the RBA’s forecasts.

Johnathan McMenamin, head of economic forecasting at Barrenjoey, said: “This is a complex set of figures that the RBA will have to navigate.”

If the RBA delays rate cuts for too long, it risks a “soft landing” of the economy, where inflation has fallen sharply in recent years without a major rise in the unemployment rate; This unemployment rate remains well below the 5%-plus rates prevailing before the pandemic.

“They’re very proud of the gains they’ve made in the labor market and the unemployment rate, and they still want to maintain that. But I don’t think they’re going to jump to a monthly employment number,” McMenamin said.

McMenamin predicts inflation will be significantly stronger and well above RBA economists’ forecasts.

This could take the RBA’s key benchmark to 2.8%; This is the first increase in nearly three years. This could delay the rate cut until next year.

Belinda Allen, the CBA’s head of Australian economics, said fears of having to restart the war in 2026 after emerging from a period of historically high inflation would keep the RBA focused on price pressures.

Allen has scheduled the next rate cut for February, at least for now.