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Stronger-than-expected employment figures are likely to see the RBA delay cutting interest rates.
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Labour market resilience to ‘delay cuts to interest rates’, economists say
21 March 2024
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A drop in the unemployment rate to 3.7 per cent demonstrates the Reserve Bank’s concerns over excess demand in the economy and labour market, according to KPMG chief economist Brendan Rynne.
Employment increased by 116,500 in February and was substantially stronger than consensus expectations of a 40,000 increase.
“While much of the increase in employment and fall in unemployment seen in February was due to people delaying their start or return to work, the underlying resilience of the labour market is still evident through strong hours worked and low under-utilisation in today’s data and elevated job ads statistics,” said Rynne.
Rynne said while the labour market will ease during the remainder of the year as a result of increased migration, the process will occur only gradually.
“The ABS data does not change our view that the RBA has completed its tightening cycle as inflation in Australia is expected to continue to fall towards the target band and the latest National Accounts show growth has slowed materially,” he said.
“However, a rate cut is likely to be delayed as the RBA will definitely want to see a better balance between demand and supply.”
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RSM Australia economist Devika Shivadekar said the latest data suggests the RBA will likely keep rates on hold until at least the third quarter of this year.
"The strength of the drop shows some remaining spare capacity in the market to absorb increasing participation. Understandably hours worked also picked up which suggests an employment market that remains robust,” said Shivadekar.
"As long as the labour market maintains its strength, the RBA can afford to overlook weakness in economic activity and concentrate on managing inflation. A robust labour market not only sustains wage growth but also supports consumer demand.
“Hence, as long as labour market resilience persists, the RBA has sufficient grounds to remain vigilant."
CreditorWatch chief economist Anneke Thompson agreed that the continued strength in the labour force would likely push back an interest rate cut till later in 2024 or even early 2025.
“This data will be taken with caution by both the RBA and Federal Treasury, as both entities have been generally expecting a slowing labour market over the next six months,” said Thompson.
AMP deputy chief economist Diana Mousina said while the labour market has held up better than expected in the face of interest rate hikes, some of the forward-looking indicators suggest there could be further weakening in the labour market.
Mousina noted that job vacancies and advertisements have fallen, underutilisation has increased and hours worked have slowed.
“Based on the leading indicators of jobs growth, we think the labour market will deteriorate further after the seasonal noise settles and put pressure on consumer incomes,” she said.
“We think the RBA will need to cut interest rates by around mid-year but there is a risk that this gets pushed to August/September if the economic data continues to hold up. There is also a broader issue that the seasonal issues in key economic indicators like retail sales and labour force lately mean interpretation of data is difficult and creates confusion, especially for policymakers.”
BDO economics partner Anders Magnusson said taking into account December’s unusually large loss of jobs, the new data does not reveal major changes to the trend of a softening labour market.
“While the labour market is softening over time, unemployment is still low. The RBA will view the decrease in the unemployment rate as an inflation risk if the next monthly release doesn’t show a return to trend,” said Magnusson.
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