We never got our great denouement with the end of the great Bloxo rate hike campaign but the worm has most definitely turned:
* Today’s labour market numbers surprised on the downside with jobs falling by -12k and the unemployment rate climbing to a new high of 6.4% in January
* Last week’s RBA cut and official statements showed that the central bank has become more downbeat on the outlook for growth and sees little risk of rising inflation
* Given today’s labour market data and recent dovish RBA commentary we expect another 25bp cash rate cut in March
EXPECT ANOTHER RBA CUT IN MARCH
Following two stronger months of labour market data, today saw a downside surprise. Employment fell by -12k in January (market had -5k) and the unemployment rate jumped to a new cycle high of 6.4% (market had 6.2%).
Although other timely indicators of the labour market – such as job advertisements, job vacancies and business survey measures of hiring conditions – have painted a more positive picture of the labour market, the official data remain weak. Today’s sharp jump in the unemployment rate in January, following two months of declines, sees the unemployment rate return to an upward trend (Chart 1). Although employment growth has lifted in y-o-y terms and is now running at 1.6%, up from 0.9% six months ago, this is still below trend and has been insufficient to push the unemployment rate lower, given strong population growth and rising participation (Chart 2).
Last week saw the RBA cut its cash rate for the first time in 18 months, revise down its own growth forecasts and generally provide dovish commentary. The RBA’s own growth forecasts were revised down to 1.75-2.75% for 2015 (previously 2-3%). The RBA also provided explicit forecasts for the unemployment rate, showing their expectation for it to continue to climb until early 2016. With growth expected to remain below trend and the unemployment rate expected to trend higher, the RBA has little concern about inflation picking up. Although they do remain concerned about the pace of growth in housing prices, particularly in Sydney, it seems that the RBA is hoping that tighter prudential settings will deal with the risk of the market over-inflating.
Following last week’s cut, we shifted our view to expecting that the RBA would deliver another 25bp cut in coming months. History shows that the RBA rarely delivers just one rate cut. Given today’s weaker than expected employment data, we now expect that another 25bp cut is likely to arrive in March, taking the cash rate down to 2.00%.
Yep. Ready yourself, APRA. I recommend making some big noise about higher capital charges for the Mac Bank mortgage free radical in advance of the cut. You need a big scalp for some big press.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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