Rise in employment will force RBA to cut

The case for another rate cut in April is building as the latest employment figures from the Australian Bureau of Statistics (ABS) show that the jobless rate has hit a four-year high.

The unemployment rate reached 5.2 per cent in February, up slightly from economists’ predictions of 5 per cent. The data showed that the Australian economy experienced its biggest monthly fall in full-time jobs in 18 years, which leaves little doubt that the economic downturn is worsening.

Many economists are already predicting that unemployment will reach 9 per cent by the end of next year. One academic was reported to have said that Australia could lose up to 500,000 jobs by the end of 2010.

The Reserve Bank will have to carefully consider the implications of the ABS data as consumers start to face more stress and businesses continue to shelve plans for expansion. The official cash rate is currently sitting at 3.25 per cent after the RBA chose to sit tight at its board meeting earlier this month.

If the economy continues to deteriorate, then the RBA will be left with no choice but to cut rates again in an attempt to ease pressure on consumers and businesses. The key issue is that a rise in the unemployment rate means that consumers spend less, which in turn, prevents businesses from hiring more staff. Until consumer confidence recovers, the economic is likely to stay weak.

Conditions in other economies continue to deteriorate and this week New Zealand’s central bank cut interest rates by 50 basis to a record low of 3 per cent. Globally the picture looks grim with some forecasters dropping the global financial crisis label in favour of the ‘great recession’. The International Monetary Fund expects global growth to fall below zero this year which suggests that the outlook for Australia will remain bleak in the short term.

The RBA will also consider other economic data out this week which showed better than expected lending figures during January. The data revealed a fourth consecutive monthly increase in housing finance as home owners took advantage of the first home owners grant.

The results from a monthly consumer sentiment survey by a major bank showed that consumer sentiment fell 0.2 per cent in March to 85.6 points, which is its lowest since November. The index was at 85.8 points in February. Economists reported that sentiment actually held up relatively well despite the flood of negative news hitting consumers since the last survey.

The Reserve Bank next meets on Tuesday 7 April.

Infochoice.com.au