Australia | Jul 10 2008
As Commonwealth Bank senior economist Michael Workman put it after the release of Australian labour market data today the Australian economy continues to experience both expansionary and contractionary forces, which is making it tougher for the Reserve Bank of Australia (RBA) to set monetary policy.
Today’s data were stronger than the market had expected, as consensus forecasts were for an increase in the labour force of around 10,000 yet the final figure was an increase of 29,800, with full time jobs up 24,000 after falling by around 12,000 last month. Part-time positions increased by 6,000 against a fall of more than 13,500 last month.
In Workman’s view the main point about the data is while the level of interest rates is slowing the economy as a whole it is not impacting on the unemployment rate, which normally happens when interest rates move above 6.0%. As a result he suggests today’s data signal the RBA may not yet be finished with its tightening cycle, so further rate hikes may be in store if other data such as the upcoming CPI numbers are different to expectations.
Westpac saw the labour data as pretty much in line with its theory there would be a gradual slowing in the rate of trend job growth, particularly as the participation rate was only slightly higher. As a result while the RBA was likely to take today’s data into account Westpac remains of the view there remain further data to be assessed. The bank does note some in the market are now expecting a rate cut rather than any further rate hikes.
Joshua Williamson of TD Securities suggests the data will keep the RBA on the sidelines for a little longer, but as labour force data are something of a lagging indicator this could be the peak and coming months will see a trend lower, supporting the group’s view rates are headed lower in Australia around the end of the calendar year.
ANZ Bank economist Riki Polygenis suggests the data are likely to make market participants at least consider the prospect of a further hike in rates next month if the upcoming CPI release proves stronger than expected, especially given the uncertainty the currently contradictory economic data are creating.
While further moderation in employment growth is expected other data will be the key, Polygenis pointing out today’s consumer inflation expectations of 5.9% are a sign the RBA will remain very sensitive to the upside risk of inflation in coming months.
This is particularly as the pace of employment growth remains consistent with solid growth in household incomes, leading Polygenis to suggest if rates are to move at all in the next 12 months it is more likely to be up rather than down.