MNI POLICY: Strong Jobs Growth Still Compatible With RBA Cuts

MNI (SYDNEY) - Continuing strong jobs growth remains compatible with a decline in underlying inflation to the midpoint of the Reserve Bank of Australia’s target range for inflation, which would allow for cuts to its cash rate from 4.35% next year, MNI understands.

While the RBA sees unemployment, and in particular the underutilisation rate, as a key factor influencing inflation, the 10-basis-point fall in joblessness to 4.1% in September was driven by higher participation rates, which, coupled with increased productivity growth, could actually help pull inflation down. Strong jobs creation, with 64,000 jobs added in the month, is not in itself a problem, the RBA considers.

The quarterly average unemployment rate, at about 4.2%, was also within range of the Reserve’s forecasts, which have joblessness climbing to 4.3% by December. The Reserve has warned previously against placing too much faith in monthly data prints. (See MNI POLICY: Markets Overplaying Impact Of Data Points On RBA) 

While Governor Michele Bullock has declined to rule out further hikes in the cash rate, the RBA is closely watching household spending and hours worked data for signs that inflation will fall back to target more quickly than anticipated in its August forecasts. Overnight index swaps imply a 25-basis-point cut in February 2025. (See MNI POLICY: RBA Watches Data For Downside Inflation Risk)

A possible revision lower to population growth estimates by the Australian Bureau of Statistics over the coming months would lead to a revision down for jobs creation and a moderation in the participation rate. However this would not impact the RBA’s inflation outlook as estimates of demand would be cut together with those for labour supply. 

The RBA has found forecasting employment growth difficult due to challenges associated with predicting population growth. It will publish updated forecasts when the board hands down its next cash rate decision on Nov 5. 

FORECASTING CHALLENGES

While public sector nonmarket jobs growth has outpaced private sector hiring, the RBA views the labour market in aggregate. However, nonmarket sector jobs have typically recorded zero productivity growth, an important factor in the Reserve's inflation outlook, and public jobs remain less responsive to changes in the inflation rate. 

Its August forecasts have productivity growth sharply increasing over 2025, though a number of former Reserve economists have questioned this assumption. 

The RBA has not formed a complete outlook on how the results of the U.S. election will impact the Australian economy and monetary policy, with various scenarios ranging from benign, to beneficial to more serious. 

U.S. policies that reduce trade in some sectors could boost other areas and industries. While tariffs on China resulting from a potential second term for Donald Trump could shrink global growth, the impact on Australia would hinge largely on Beijing’s response, which is impossible to predict. 

The RBA will also need greater detail on U.S. fiscal policy and whether it is large enough to outweigh the contractionary impact of higher tariffs.