Labour Force data could make for a cautious RBA

The latest Labour Force data released by the Australian Bureau of Statistics (ABS) has revealed a drop in the unemployment rate to 3.7 per cent in February (seasonally adjusted).

This followed a 0.2 percentage point increase in January, which saw the unemployment rate rise from 3.9 per cent to 4.1 per cent.

According to the ABS, the substantial increase in employment for the month followed “larger-than-usual numbers” of people during December and January who had a job that they were either waiting to begin or return to.

As a result, a larger-than-usual flow of people entered employment in February, even more so than February last year.

ABS head of labour statistics Bjorn Jarvis said: “With employment growing by around 116,000 people, and the number of unemployed falling by 52,000 people, the unemployment rate fell to 3.7 per cent. This was around where it had been six months earlier.

“In 2022 and 2023, around 4.3 per cent of employed people in February had not been employed in January. In 2024 this was higher, at 4.7 per cent, and well above the pre-pandemic average for 2015–20 of around 3.9 per cent.

“In contrast, we again only saw around 3.1 per cent of employed people in January leaving employment by February, which was similar to last year and has remained relatively constant over time.

“This shows that there is a wider gap than we would usually see between the numbers of people entering employment and leaving employment.”

What does this mean for the RBA’s outlook?

During the March monetary policy meeting press conference, RBA governor Michele Bullock emphasised the board’s uncertain outlook on where interest rates are going, stating that the central bank cannot “rule in or out anything”.

Nevertheless, the RBA’s dependency on emerging data is still prevalent, with Bullock explaining that the board is “responding to data as the data comes out”, with unemployment being one of the key indicators watched by the RBA.

CreditorWatch chief economist Anneke Thompson said the latest unemployment data will be “taken with caution” by the RBA and Treasury.

“… [B]oth entities have been generally expecting a slowing labour market over the next six months,” Thompson said.

“However, any continued strength in the labour force will likely push back the expectation of an interest rate cut to later in 2024, or even early 2025.”

HSBC Bank chief economist Paul Bloxham said the RBA is expected to see these figures as “supporting its decision earlier this week to hold the cash rate steady, and to note at the press conference that it is still not clear whether the next move for the RBA cash rate will be up or down”.

“Our central case is that the cash rate will be held steady at 4.35 per cent through 2024, with cuts not arriving until early 2025,” Bloxham said.

Deutsche Bank economist Phil O’Donoghue stated that the data served as a “timely example” of the uncertainty highlighted by Bullock during the press conference.

“That uncertainty left the governor concluding that it is ‘too soon to rule anything in or out’,” O’Donoghue said.

“If that was true on Tuesday [19 March], it is even truer now.”

Blair Chapman, senior economist at ANZ, stated the major bank has not shifted its view that the RBA is on hold until November.

“Today’s numbers do reduce the possibility of an earlier start to easing, with the labour market generally stronger than expected,” Chapman said.

[RELATED: ‘We’re uncertain, we don’t know’, Bullock on rates outlook]