Soft jobs numbers suggest rates on hold

Signs that the economy is cooling and the Reserve Bank is winning its war against inflation are good news for RBA governor Glenn Stevens. A surprising fall in job numbers during May will take some pressure off the RBA to act. The official cash rate looks set to stay steady at 7.25 per cent in the short term.

The latest labour force data released this week indicates that the Australian labour market is softening. The total number of people employed fell by 19,700 which is in stark contrast to the 13,500 new jobs that economists expected to be created during the month.

The workforce participation rate shrank from 65.5 per cent in April to 65.2 per cent in May. The unemployment rate was 4.3 per cent, seasonally adjusted in May, which represents no change from the revised 4.3 per cent figure recorded at the end of April this year.

Economists were not expecting a contraction in jobs growth so soon and pundits seem to have pulled back their expectations of two rate rises this year. The money’s on at least one rate rise, depending on what happens with wages growth.

A continued tight labour market, particularly in the mining sector will be one of the largest threats to inflation. If wages get pushed up, then the RBA will be forced to act. If recent union pressure for wage hikes turns into a wages outbreak, and in turn a rise in prices, the Reserve Bank will not be happy.

Greater clarity about the RBA’s intentions will emerge when the Board next meets on July 1. The Bank will continue to scrutinize inflation data, with particular focus on the next round of figures which are due out at the end of July.

Infochoice.com.au