Surprise drop in unemployment rate eases pressure on RBA
Australia’s unemployment rate unexpectedly dropped in December, surprising economists and easing pressure on the Reserve Bank of Australia to cut interest rates this year.
The Australian Bureau of Statistics said on Thursday that the number of people employed rose by 37,400 to 11.67 million in December, against market expectations of 5,000.
This took the official unemployment rate to 6.1 per cent from a revised 6.2 per cent in November, while the participation rate climbed from 64.7 per cent of the population to 64.8 per cent.
The figures were much better than expected, and the Australian dollar surged more than half a US cent on the news, to above US82.06 cents.
Economists immediately began re-examining their forecasts for cuts in the RBA’s 2.5 per cent cash rate this year, although many were cautious about the longer-term trend, the broader economic health of Australia, global factors and the reliability of the ABS labour force series. This was called into question last year after wild, inexplicable gyrations in the numbers from month to month.
“Again, based on errors from last year the data may not be as significant as it reflects,” said Quay Equities in note.
“However, on the data we do have it is a good yet volatile number, [which] probably gives the RBA the scope to delay any short term interest rate cuts,” Quay said.
Market expectations of rate cuts also eased on the jobs data. According to Credit Suisse, the chance of a quarter percentage point rate cut at the next RBA meeting early next month halved, from 19 per cent to 9 per cent on Thursday.
Immediately before the jobs data, traders were pricing in a more than 25 per cent chance of a cut.
The market still fully expects at least one rate cut this year, but the chance of an additional one has dropped to 44 per cent from 64 per cent.
Bank of America Merrill Lynch economist Alex Joiner agreed, saying the result “clearly reduces pressure, which may have been building, for the RBA to ease policy in the short term”.
However, he also warned that the drop in unemployment could be short-lived.
“We continue to expect that the unemployment rate will rise in 2015, reaching a peak just over 6.5 per cent,” he said.
“In our view, this will be due to a combination of cyclical weakness and structural adjustment away from the resources sector.”
Despite yesterday’s figures, most Australian-based economist still expect a subdued growth rate this year, with falling commodity prices threatening jobs, government revenues and the profitability of numerous resource-related companies.
Australia and New Zealand Banking Corporation chief economist Warren Hogan said weaker growth and lower inflation in 2015 would “provide the RBA with a reason and the scope to take the cash rate down 50 basis points to 2 per cent over the first half of the year”, although the rate cut timing was revised to later in the year after the jobs data…
Read more by Mark Mulligan, Sydney Morning Herald 15 January 2015
The Australian Long-Term Unemployment Conference will be held on the 9 -10 November 2015 Pullman on the Park, Melbourne. Visit the conference website for more information.