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No Urgency for February Rate Cut as Jobs Report Surprises Economists

No Urgency for February Rate Cut as Jobs Report Surprises Economists

Economists are saying the Reserve Bank of Australia (RBA) doesn’t need to rush into a rate cut after a strong jobs report revealed continued resilience in the labour market. This puts the central bank’s next decision point in April, with the February meeting likely to be skipped.

A Solid Jobs Market Defies Expectations

  • The Australian Bureau of Statistics (ABS) revealed that 56,000 jobs were added in December.
  • Employment gains were largely driven by an increase in part-time roles (80,000), offset by a decline in full-time employment (23,700).
  • Despite this growth, the unemployment rate rose slightly to 4%, due to a higher participation rate, which hit a record 67.1%.

Strong Participation Shows Labour Market Health

The rise in participation shows that more Australians are looking for work, pushing the unemployment rate up. Economists believe this reflects the ongoing strength of the labour market, despite rising interest rates.

  • The participation rate reached a record high of 67.1%.
  • The employment-to-population ratio climbed to 64.5%, marking a fresh high.

A Tight Labour Market Makes Rate Cuts Unlikely

Some economists argue that a tight labour market reduces the urgency for the RBA to cut rates in February. The job market remains resilient even amid significant interest rate hikes, with some predicting that rate cuts may not be needed until May.

  • Economists like David Bassanese from Betashares argue that the strength in the labour market should keep the RBA from cutting rates.
  • Capital Economics analyst Abhijit Surya agrees, stating that with the labour market performing well, there’s no immediate reason for the RBA to ease monetary policy.

Also Read: Australian Home Prices Fall for the First Time in Two Years

The Prospects of Pre-Election Rate Cuts

The federal election is due by May 17, which has led to speculation that the Albanese government may seek relief for struggling households through a pre-election rate cut. While inflation data has softened, economists caution that the strong jobs report may make this unlikely.

  • Traders initially saw a 75% chance of a February rate cut, but the jobs data has reduced that to 66%.
  • Some market analysts still believe the RBA may consider a rate cut in February if inflation data remains low.

Job Openings Signal Labour Market Strength

Job openings have increased, marking the first rise since May 2022. This suggests that the job market might not be weakening but could actually be strengthening.

  • The youth unemployment rate and under-utilisation rate have both decreased, indicating further tightening in the labour market.

Public Sector Dominates Employment Gains

Recent job gains have come from the public sector, which includes government-funded industries such as healthcare, education, and public service. This trend has raised questions about the sustainability of these gains.

  • The increase in hours worked in the year to December was primarily in non-market sectors.

Wages Growth and Inflation Impact

Wages growth has slowed, from 4.1% in June to 3.5% in September. The slow wage growth, combined with a tight labour market, could present a challenge for the RBA in achieving stable inflation.

  • EY senior economist Paula Gadsby notes that inflationary pressures could emerge as wages continue to grow slowly, with weak productivity and high government spending.

Challenges for the RBA’s Monetary Policy

Economists like Diana Mousina suggest that the RBA may find it difficult to balance the need for low inflation while managing strong employment data. As the jobs market remains tight, inflation could still rise, complicating the central bank’s efforts to bring inflation within its target range.

What’s Next for the RBA?

The RBA board meets again on February 17-18. While market traders are betting on a 70% chance of a rate cut in February, many economists argue that the data doesn’t justify such a move. The upcoming inflation figures for the December quarter, released on January 29, will provide more clarity.

  • Some analysts believe that inflation will remain subdued, making a rate cut in February unlikely.
  • Others predict the RBA will keep rates unchanged until at least the second quarter of the year.

Conclusion: A Complex Decision for the RBA

The RBA faces a challenging decision as it weighs the tight labour market against broader economic conditions. While strong employment data suggests the economy is holding steady, the central bank will need to carefully evaluate upcoming inflation figures before making any drastic decisions.

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