Surprise fall in jobless rate lessens likelihood of rate cut

More people in work means more money being spent, which in turn fuels inflation and puts upwards pressure on interest rates.

The news released Thursday (12 December) that Australia’s jobless rate fell in November from 4.1 to 3.9 per cent was a surprise for economists, welcome news for job seekers and a little startling to borrowers.

The resilient labour market has been one of variables under the Reserve Bank of Australia’s (RBA) magnifying glass as it weighs up its interest rates settings and these figures from the Australian Bureau of Statistics will do little to bolster sentiment around a possible rate cut.

In keeping rates on hold at 4.35 per cent at its December meeting, the RBA Board made particular note of the unemployment rate, and that was before this latest fall in the jobless rate.

“A range of indicators suggest labour market conditions remain tight.

“Employment grew strongly over the three months to October (and even stronger since), the participation rate remains close to record highs, vacancies are still relatively high and average hours worked have stabilised.

“The Board … will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.”

The economy added 9,700 full-time jobs and 6,200 part-time roles, making a net change of 15,900 positions. Economists had tipped employers would add a net 25,000 jobs in October.

So the labour market is another nail in the coffin of any perceived imminent interest rate cut.

Softer economic conditions and inflation trending downwards have sent signals that a rate cut may still come next year.

The central bank’s subtle rewording of its monetary policy decision was notable. It dropped its long-repeated warning that it might move either way on interest rates, the inference being they won’t go up.

Inflation, impacted as it is by the labour market, remains the main focus.

Speaking at a press event after the interest rates decision, RBA Governor Michele Bullock generated optimism that rate cut may still occur as soon as February.

“We’re not saying that we’ve won the battle against inflation yet,” Ms Bullock said.

“But we’re saying we’ve got a little bit more confidence that things are evolving as (predicted) in our forecasts.”

The Reserve Bank has a dual mandate to keep inflation within its 2-3 per cent target range but also to ensure the economy is as close to full employment as possible.

The RBA’s latest quarterly forecasts, released last month, had the unemployment rate ending 2024 at 4.3 per cent, which is now an unlikely result without a lot of job shedding in December.

David Bassanese, Chief Economist, Betashares, said the “blockbuster” November jobs figures pushed back the likelihood of a February RBA rate cut, perhaps to May.

Sean Langcake, Head of Macroeconomic Forecasting, Oxford Economics Australia, said a delay interest rate cuts was likely.

“The data supports our expectation that the RBA will keep rates on hold until at least May,” he said.

“The RBA board will be reluctant to ease rates while underlying inflation is above target and the labour market is operating so close to its capacity.”

Interest rates are a major influencer of household budgets and the recently released API Magazine Property Sentiment Report Q3 2024 revealed that interest rates were among the top few factors influencing their property decision-making in the next 12 months.

The report also found that buyers and sellers alike recorded sizeable upticks in the proportion who said interest rates are affecting their property-related decisions (see pp8-9).

The latest Real Estate Institute of Australia Housing Affordability Report revealed Australians are now typically spending a deeply concerning 48 per cent of their household income on their mortgage repayments.