MNI: Hot Labour Market Pushes Back Easing-Ex RBA Economists
MNI (SYDNEY) - A still-hot labour market raises the odds that the Reserve Bank of Australia will maintain its cash rate at 4.35% beyond next February, former RBA officials told MNI, though they noted some signs of incipient weakness in recent data.
While some economists had pinpointed February as a likely start to the easing cycle, the RBA Board is likely to opt to continue to hold should employment remain strong, said Blair Chapman, senior economist at employment website Seek and a former RBA research economist and lead analyst, speaking after 65,000 jobs were added in Septemberas unemployment tightened 10 basis points to 4.1%.
Government spending, particularly on healthcare and social assistance, has driven consistently strong employment growth, together with unexpectedly-strong dwelling investment and house completions,Chapman said. But the labour market's resilience will still surprise the RBA given weak consumption, he added.
The RBA, which is scrutinising household spending and hours worked data for signs that sustained disinflation would justify a move away from its recent hawkish stance, has forecast unemployment will reach 4.3% by December. (See MNI POLICY: RBA Watches Data For Downside Inflation Risk)
"There's a few areas where we would expect to see more pull back on employment growth and it's not really showing up," Chapman continued, noting the Reserve will need to rework its forecasts when it next publishes its updated Statement on Monetary Policy following the Nov 4-5 meeting.
Still, labour force data is inherently backward-looking, he cautioned, noting weakness had recently appeared in lower starting wages growth for new employees.
FRESH EVIDENCE
The RBA will need to see sustained disinflation and be comfortable that its forecast for trimmed-mean inflation to return to its 2-3% target band by December 2025is solid before it contemplates rate cuts, said Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist.
Langcake has pushed back his initial rate-cut estimate to May, noting the Board's continued cautious rhetoric. “We are still talking about an economy that's running above capacity in the RBA's estimation and that's hard to argue with based on where inflation still is,” he added. “It doesn't take much to generate an upside surprise, whether it's home building bottlenecks or retailers clawing back margin with consumers having a little bit more money in their pocket after tax cuts. Some of the price changes are still going to be pretty punchy through Q3.”
Markets have priced in 8.4% and 25.8% chances of a move lower at the November and December meetings, about 5bp softer following the release of the employment figures, with the February decision attracting a 44% probability for a 25 basis point cut, about 12bp lower.
“We're all expecting to see disinflation continue… but there's not going to be enough in the Q3 CPI data alone to prompt a rate cut, and probably not even the one after that,” Langcake added.
Advertised rent growth has likely peaked, but this will lag the CPI significantly and continue to support inflation for some time, he said.
While the upcoming National Accounts due Dec 4 might provide detail on consumer spending – an area of high uncertainty – the RBA will already have confirmed its view via CPI and labour market data, he added, noting consumption this year had proved unreliable due to significant revisions driven by overseas spending figures.
CAUTIOUS STANCE
A desire to avoid inflating the property market could also tempt the Bank to maintain its current monetary-policy stance for longer, noted Luke Hartigan, a lecturer at the University of Sydney and a former RBA economist, pointing to the recent Financial Stability Review, which stressed a lower cash rate would boost house prices.
The market should focus on the RBA’s trimmed-mean inflation forecast within the upcoming statement to ascertain when the easing cycle could begin, he added.
“If their forecasts see things come in to target sooner, then they will act because they're setting policy based on what they expect, not what's happening.”
But Hartigan warned imported disinflation via goods and energy prices could provide a stronger disinflationary impulse, judging by New Zealand’s CPI results released Wednesday, while China's slowing economy could also upset the RBA's forecasts.