RBA likely to resume rate cuts sometime in 2013 after unemployment rise: Macquarie’s Brian Redican

The unexpected rise in the unemployment rate in March may spur the Reserve Bank to begin cutting rates again, but not immediately, says Macquarie senior economist Brian Redican.

The unemployment rate increased by 0.2 percentage points to a two-and-a-half year high of 5.6% in March.

Redican attributed to the rise in unemployment – 36,000 jobs were lost over the month – to a weakening in the jobs market possibly due to a slowdown in mining investment.

He told AAP the March figures would be added the “column suggesting further rate cuts may be needed”.

However, he said the RBA was unlikely to cut the cash rate on one set of numbers alone.

Redican says the cash could fall as low as 2%.

The most recent Bloomberg survey of economists has Macquarie Bank tipping a cash rate of 2% by the end of the year, with a rate cut pencilled in for May.

HSBC chief economist Paul Bloxham says the labour force survey can be very volatile with the past couple of months “a clear example of this” and also points out that the ABS is 95% confidence the unemployment rate was between 5.4% and 5.8%.

Bloxham says the trend numbers “probably give a clearer read”.

“They showed that employment rose by 12,600 jobs in March, the unemployment rate was steady at 5.5% and the participation rate was steady at 65.1%,” he says.

“Overall, the labour market remains loose, with an unemployment rate above our full employment estimates of around 5.0%.

“This leaves the RBA with scope to cut rates if they need to. But the question is: will they need to?

“Other indicators suggest that the rate cuts they have already delivered are having many of the desired effects.

“Retail sales rose strongly in January and February. Consumer sentiment rose sharply in February/March and, although it retraced a little in April, is still above average. Housing prices have been rising solidly in recent months. The housing construction upturn has continued,” he says.

Bloxham says a loose labour market does provide the RBA with scope to ease further if it needs to, but does not believe the RBA will need to.

“We expect some tightening of the labour market in coming months as the interest-rate sensitive sectors gain pace.”

ANZ's economics team agreed with Bloxham.

“[The March unemployment figures] firmly suggest that the RBA will be in no rush to dispose of its easing bias,” says ANZ in an economic note.

“We and the Bank have been looking for the unemployment rate to rise slowly and the trend labour force data clearly show this.

“As a result, the figures are also unlikely to be enough to result in the RBA acting on its easing bias for the time being. The low level of capacity utilisation in Australia suggests that an improvement in the unemployment rate is not expected in the near term.”

“The RBA has communicated that they expect the labour market to weaken, with the unemployment rate rising modestly over 2013.  The March employment data is in line with this view.  We expect that the cash rate will remain on hold in May and over 2013,” said CBA economist Michael Workman.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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