Labour force and inflation to weigh on RBA’s decision 

Australia’s unemployment rate held at 3.5 per cent in December, according to the Australian Bureau of Statistics (ABS) in line with the revised jobless figure for the month of November.

The data noted that employment decreased by around 15,000 people and the number of unemployed increased by 6,000 people, holding the rate at 3.5 per cent.

While Australia’s unemployment rate held steady in December, a further slowdown is an “inevitable consequence” of rising interest rates, the federal Treasurer has warned.

Treasurer Jim Chalmers welcomed the news that the “unemployment rate stayed around historic lows at 3.5 per cent” but noted eight interest rate rises in a row will “begin to have an impact” across the economy.

“Our economy is expected to soften a little this year as a consequence of those factors coming at us from around the world and being felt around the kitchen tables of this country and we’ll see that in the unemployment rate,” Mr Chalmers said.

“That is in many ways an inevitable consequence of higher interest rates.”

The ABS data found the decrease in employment followed an increase of 58,000 people seen in November, with average monthly growth of around 40,000 people between the months of August and November.

The Treasury forecast is for employment growth to ease and for the unemployment rate to “edge up a little bit” but to still remain around these historic lows, Mr Chalmers said.

Inflation to weigh on RBA’s decision

AMP economist, Diana Mousina, reiterated the Australian labour market was in “very good shape”, which will support consumer incomes but that Australia is “probably past peak employment now and the labour market will soften from here”.

“It’s not surprising to see a slowing in the pace of jobs growth, especially as interest rates were lifted so aggressively in 2022,” she said.

“The RBA is looking for the unemployment rate to increase a little to 3.7 per cent by the end of the year but this looks too optimistic now.”

She added that the monthly inflation reading, out next Wednesday (25 January), is pointing towards a downside surprise to the December quarter CPI data, which hit 7.3 per cent.

“The February RBA meeting will be a close decision, with a high risk that the central bank decides to hike by another 0.25 per cent,” she said.

However, she remained of the view that the RBA will keep the cash rate unchanged at 3.1 per cent.

In contrast, HSBC chief economist, Paul Bloxham, said “[unemployment] figures continue to give the central bank options when it meets in early February”.

“Solely focusing on the high inflation numbers would likely see them hike further yet,” he said.

While acknowledging that the latest data release came in “weaker than expected”, senior economist at ANZ, Catherine Birch, said next week’s inflation figures would be an important indicator of the RBA’s next move.

“We still expect the cash rate to reach 3.85 per cent in May,” she said.

“With 444,200 job vacancies recorded in November (around double the pre-pandemic level) and businesses still in hiring mode, it’s hard to see a sharp rise in unemployment any time soon.”

Inflation expected to ease

Meanwhile, Westpac economist, Bill Evans, forecast next week’s inflation will peak at 7.4 per cent, before slowing down.

“We expect headline inflation in 2023 to slow to 3.7 per cent — well below the Reserve Bank’s current forecast of 4.7 per cent,” Mr Evans said.

“While lower than the current official forecast the annual print in 2023 will still be well above the Bank’s 2–3 per cent target range, most likely precluding it from easing policy anytime in 2023.

“With inflation running well above the target range it seems it will be reluctant to ease policy during 2023 despite a stagnating economy; a rising unemployment rate and a slowdown in inflation momentum in the second half of 2023.”

Similarly, NAB’s economist, Taylor Nugent, expects a fall in headline inflation below 7 per cent YoY in Q1/23 and around 6 per cent in Q2/23.

“Goods and new housing are expected to be key sources of disinflation,” he proffered conversely.

“Price rises for new dwelling construction has also materially slowed with a risk of some price falls for new contracted homes over the year ahead.”

[Related: Inflation to slow after likely Q4-22 peak: NAB]