Employment Data Another Tick In The Box For A Rate Hike

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By Chris Shaw

Despite a slightly softer than expected jobs growth outcome for September, unemployment in Australia is now at a 33-year low of 4.2%, with Westpac senior economist Anthony Thompson suggesting further downward pressure on the unemployment rate into 2008.

He bases this view on leading indicators of labour demand, which suggest employment growth next year should continue at an annual rate of around 3.0%, which in turn will continue to provide support to both consumer confidence and spending.

According to TD Securities global strategist Stephen Koukoulas such an outcome poses some problems for the Reserve Bank of Australia (RBA), as it suggests inflation pressures will remain elevated in coming months.

This is because the tight labour market is likely to flow through into higher wages, which makes it likely inflation will remain at the upper end of the RBA’s target band. Koukoulas suggests this makes a November interest rate hike almost a certainty, the more important question being whether or not that will be enough to keep inflation under control.

His view is the case for two or more rate hikes in coming months is growing stronger, with the upcoming CPI date due later this month to determine whether the first move occurs next month. He expects the data to show underlying inflation of 1.0%, with Commonwealth Bank economist Joseph Capurso suggesting an outcome of 0.9% would be enough to force the RBA to act again on rates in November.

ANZ Bank economist Riki Polygenis doesn’t agree with such a timetable, suggesting the most likely time for a tightening of monetary policy is next February. This is based on the view the CPI data does not come in worse than expected, with consensus forecasting an increase in underlying inflation of 0.7%.

While prior to the CPI data there will continue to be some doubt as to the timing of any further action on interest rates by the RBA, the one thing apparently not in doubt after today’s employment outcome is rates are going higher, whether it be next month or early next year.

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