Markets have raised bets that outgoing Reserve Bank governor Philip Lowe will increase interest rates after the jobless rate in Australia’s most populous state fell to 2.9 per cent, entrenching unemployment at a level Treasury and the central bank say is inflationary.
About 32,600 people found work in June, the latest Australian Bureau of Statistics data shows, countering economists’ expectations for modest employment growth of 15,000.
The gains helped the jobless rate hold steady at a downwardly revised 3.5 per cent, keeping the national unemployment rate within the narrow 3.4 per cent to 3.7 per cent range it has hovered in since June last year.
Evidence of persistent labour market tightness prompted traders to revise higher their estimate of the RBA’s peak cash rate to 4.5 per cent from 4.4 per cent.
Markets ascribe a 56 per cent chance the central bank will increase the cash rate to 4.35 per cent from 4.1 per cent at its meeting on August 1, up from 36 per cent before the release of the jobs figures. They are fully priced for a 0.25 percentage point increase by RBA deputy governor Michele Bullock’s first meeting as RBA governor on October 3.
Successive months of strong jobs growth pushed the unemployment rates in NSW and Tasmania to their lowest levels on record at 2.9 per cent and 3.5 per cent, respectively.
Ms Bullock said last month a 4.5 per cent unemployment rate was necessary to engineer a return to the RBA’s 2 to 3 per cent inflation target.
As unions push the RBA to maintain unemployment at levels the central bank views as unsustainable, Employment Minister Tony Burke would not be drawn into the debate on Thursday.
He neither backed union claims nor shared the RBA’s concerns about the inflationary effects of the tight of the jobs market.
“When someone gets a job, we see that as a success,” Mr Burke said.
Economists say the June-quarter consumer price index, due on July 26, will be the main factor determining whether the RBA increases the cash rate to 4.35 per cent on August 1.
NAB expects headline inflation to fall to 6.1 per cent in the June quarter, but its economist Taylor Nugent said that would not signal an end to rate rises.
“Overall, while we do not expect the June-quarter outcome to sharply surprise the RBA’s May forecast, we do think that the detail will be indicative of some persistence in inflation pressures that the RBA has been citing as a risk,” Mr Nugent said.
The Australian Council of Trade Unions is pushing Labor to redefine full employment as “zero involuntary unemployment” in the federal government’s updated Statement on the Conduct of Monetary Policy, due to be signed with the RBA later this year.
The change, if adopted, would alter the RBA’s existing approach to monetary policymaking, given the bank uses as its main gauge of full employment the non-accelerating inflation rate of unemployment (NAIRU).
The RBA estimates the NAIRU, which is the unemployment rate at which inflation is neither rising nor falling, to be in the “low 4s”, meaning the central bank views the current 3.5 per cent unemployment rate as unsustainably low.
Although high interest rates have forced households to cut discretionary purchases, the slowdown in spending is yet to spill over into the jobs market, which is tighter than at any point in almost 50 years.
June’s employment gains were driven by a 39,300 increase in full-time workers, which was only partly offset by a 6700 fall in part-time employment.
The outcome took employment growth in the June quarter to 0.9 per cent and annual employment growth to 3 per cent, which was higher than the 2.5 per cent projection in the RBA’s May economic forecasts.
Employment gains of at least 31,000 are needed each month to stop unemployment from ticking higher based on the current rates of population growth, assuming the participation rate stays unchanged.
The RBA expects the jobless rate to break its holding pattern and drift higher to 4.5 per cent by mid-2025 due to the dampening effect of 12 interest rate rises.
While the jobs numbers will keep pressure on the RBA to lift interest rates, BetaShares chief economist David Bassanese said the June-quarter CPI would be the main driver of the central bank’s decision.
The central bank’s May forecasts show it expects headline inflation to fall to 6.3 per cent in June from 7 per cent in March.
Mr Bassanese said the softer-than-expected monthly CPI indicator for May, which showed a sharp decline in headline inflation to 5.6 per cent, meant there was a possibility the June-quarter CPI could show inflation had fallen below 6 per cent.
“If the quarterly CPI confirms the pleasing drop in headline and core inflation contained in the May monthly CPI report, there’s still a good chance the RBA will refrain from raising rates again in August,” he said.
But that view is not shared universally. NAB’s Mr Nugent said he expects core market services inflation to show no moderation, running at similar rates to late last year and annualising above 6 per cent.
That persistence means the RBA will probably revise its underlying inflation outlook higher in its August forecasts, Mr Nugent said.
“A further tightening in policy therefore will be needed to have greater confidence in getting inflation back to 3 per cent by mid-2025, and NAB continues to expect the RBA will raise the cash rate in August and to 4.6 per cent over coming months.”
Oxford Economics Australia head of macroeconomic forecasting Sean Langcake said the jobs market looked strong across the board, with participation near record highs and unemployment close to a five-decade low.
“This is unambiguously good. However, the strength of the labour market will continue to keep upward pressure on wages and inflation,” Mr Langcake said.
Almost 95 per cent of the employment gains over the past three years were in full-time work. About 70 per cent of workers in June were employed full-time, the highest level in a decade.
The participation rate – the percentage of working-age people in the labour force – edged lower to 66.8 per cent, just shy of the record 66.9 per cent level hit in May.
Hours worked across the economy increased 0.3 per cent, taking the growth in hours over the past 12 months to 4.7 per cent as employees put in more time at work.
Low unemployment has driven nominal wages growth to a decade high. Data released in May showed salaries increased 3.7 per cent in the year to March, while pay rises for workers on enterprise bargaining agreements recorded their biggest jump in 11 years in the March quarter.
However, economists do not expect current levels of labour market tightness to persist, and leading indicators point to higher unemployment.
This includes household expectations of unemployment, which have increased 32 per cent since May last year, and job vacancies, which have fallen 10 per cent since their peak, according to data from the ABS.
ANZ chief economist Adam Boyton said there were signs the labour market was starting to cool.
“The underemployment rate is up 0.6 percentage points from its low, while NAB’s June-quarter business survey showed the proportion of businesses reporting labour as a constraint on their output declining slightly from 86.5 per cent to 82.8 per cent,” Mr Boyton said.
“The slowdown in economic activity suggests employment growth and growth in hours work should cool materially over coming months.”