RBA: Xmas rate cut is not ruled out – UOB

Lee Sue Ann, Economis at UOB Group, assessed the recent results from the Australian labour market.

Key Quotes

“Australia’s unemployment rate climbed to 5.3% in October, disappointing market expectations for it to hold at 5.2%. Total employment fell by 19,000 in October, from a revised 12,500 gain in September, way below expectations for a 15,000 increase. This was the largest drop in employment since September 2016 and only the second monthly drop since then”¦ The labor force participation rate also unexpectedly declined to 66.0% from 66.1%. Highlighting the labor market slack, the underutilization rate, which combines unemployment and under-employment, rose to 13.8%”.

“The latest labour market report clearly does not bode well for the Reserve Bank of Australia (RBA)’s overall assessment of the Australian economy, of which the RBA has made its message clear about how closely it is watching the labour market”.

“Concerns about household spending were highlighted by official figures yesterday (13 November) which showed wages growing less than expected in the last quarter. Australia’s wage price index rose 0.5% q/q for 3Q19, down slightly from 0.6% in the three months to March, whilst year-on-year growth moderated to 2.2% from 2.3%. Slack in the labour market has clearly weighed on wage outcomes, and will need to accelerate in order to meet the RBA’s subdued wage forecast. Previously, the RBA highlighted that wage growth of around 3.5% y/y would be needed to sustainably lift inflation back to the middle of their 2%-3% target band”.

“It was also in the RBA’s quarterly Statement on Monetary Policy, published on 8 November, that officials argued that it was “increasingly clear” that lower unemployment is needed to generate wages growth consistent with achieving their inflation target. These considerations, they noted, have pointed to the case for further policy easing in recent months and also suggest that the RBA’s bias remains in favour of further policy easing in the months ahead”.

“The next and final RBA meeting for the year is on 3 December, a day before 3Q19 GDP data is due for release. Although our forecast is for a steady official cash rate (OCR) of 0.75% for the rest of this year, a rate cut at the December meeting cannot be ruled out now, following the soft wages and employment reports”.