Karen Maley | The Australian Financial Review | 10 May 2019
Australia is set to see interest rates hit fresh historic lows in coming months, unless strong jobs market and rising commodity prices come to the aid of dwindling growth and inflation.
Reserve Bank governor Phil Lowe has his finger poised over the interest rate cut button, but he’s just waiting for a slightly clearer reading of what’s happening to country’s labour market before he finally pushes ahead.
As the RBA’s latest statement on monetary policy makes clear, many of the pre-conditions for cutting rates are undoubtedly in place.
“Growth in the Australian economy has slowed and inflation remains low”, the May statement begins.
The trouble is that this feeble economic activity is somewhat at odds with the buoyancy of the labour market. And this raises the distinct possibility that the economy is actually more robust than the official figures suggest.
As the May statement notes, “recent labour market conditions suggest that economic activity may have been stonger than the GDP data have signalled.”
If this is the case, then the RBA’s forecasts for both economic growth and unemployment – the central bank expects the jobless rate will be stuck around 5 per cent for some time, before dipping to 4.75 per cent by mid 2021 – could turn out to be overly pessimistic.
As the statement suggests, it’s also possible that some of the weakness in economic activity in the past few months was only temporary, in which case “the labour market could be more resilient than forecast”.
And this has major ramifications for monetary policy, because if the jobs market does prove to have more vigor than expected, this is likely to translate into higher wages growth, which will help support inflation.
What’s more, the rebound in commodity prices is helping to boost national income, which, if sustained, could boost growth and inflation.
Still, while the RBA is clearly somewhat sceptical that it points out that this upside risk to demand and inflation will eventuate.
As the statement points out, it remains very unclear how quickly any fall in the jobless rate will translate into wage pressures, and help push inflation higher.
And there is even some discrepancy in the readings on the labour market, with some leading indicators of labour demand – especially job ads – suggesting that jobs growth will be weaker than expected than what is indicated by business surveys.
As a result, Lowe has decided that the best course of action is to wait and see what transpires in the labour market in coming months before pushing ahead with rate cuts.
And because of the confusion in signals, it’s likely that he’ll closely scrutinise a range of labour market indicators – including the unemployment rate, job ads, and business conditions, as well as the wage price index due to be released next month – before making the decision to cut official rates below the 1.5 per cent level they’ve sat at since August 2016.