Insight: RBA More Downbeat on Labor Market, Could Cut Again

By Sophia Rodrigues

A key factor in the Reserve Bank of Australia’s rate decision Tuesday was more downbeat outlook for the labor market, that meant the economy needed more stimulus via a cut in the cash rate.

The urgency to reach the full employment level means the door is open for another cut, as soon as next month.

Earlier Tuesday, the RBA lowered the cash rate by 25 basis points to a new record low of 0.75%. This is the third cut in the cash rate this year, after a prolonged period of on-hold decisions that saw the rate at 1.5% from August 2016 to May 2019.

Australia’s jobless rate was at 5.2% in April and the latest data, published by the Australian Bureau of Statistics showed a rise to 5.3% in August.

The rise in the unemployment rate means the economy is moving away from the full employment level which is currently estimated at 4.5%, rather than moving towards it. That is a concern.

Added to that is increased signs that employment growth is likely to moderate from the previous fast rate.

The RBA pointed to this in the August Statement on Monetary Policy when it said, “Forward-looking indicators of labour demand have moderated since 2018.” But decided to put more emphasis on this view by including it in the cash rate statement Tuesday where it said, “Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate.”

A slowing in employment growth would reduce the prospect of fall in the unemployment rate, and might even put upward pressure on the jobless rate.

A fall in the unemployment rate to the full employment level of 4.5% is very important for the RBA because it doesn’t expect wage growth to accelerate until this happens, and unless wage growth accelerates, the RBA is not confident inflation will rise to the mid-point of its target band.

The cut in the cash rate would improve the economy’s labor market prospects via its impact on household disposable income, and thus the outlook on household consumption.

The rate cut is also aimed at putting downward pressure on the exchange rate, and in the least, to counter any upward pressure from actions from global central banks to forces that are leading to the trend to lower interest rates globally.