RBA needs to cut interest rates several times: Credit Suisse

The Reserve Bank of Australia might need to cut interest rates several times due to the weakness in the labour market, according to Credit Suisse, a view which goes against the general market expectations.

While jobs growth in April beat expectations and the unemployment rate fell to a four-month low, full-time jobs edged down and the weakness in the detail would have been bigger if not for another month of bias from the sample rotation, Credit Suisse analysts, led by Damien Boey, said in a note to investors, the Business Insider reported.

The current cash rate is at a record low of 1.5 percent and many industry observers say the RBA will actually lift its cash rate, though this won’t be anytime soon. 

HSBC’s senior economist Paul Bloxham also recently suggested that the Q1 CPI numbers also suggest that rate rises are not likely any time soon. 

“The output gap is at levels historically consistent with another cash rate cut,” Credit Suisse said. “We believe there is a case for multiple cuts, because our measure of the output gap is based on upwardly-biased labour market data, and probably understates the degree of slack in the economy.”

That said, Credit Suisse felt the positive headline data means the RBA is yet to get a trigger to change its policy stance, the Business Insider said.

Latest ABS data showed Australia added 37,400 jobs, well above expectations for an increase of 5,000.

However, full-time employment fell by 11,600 over the month, while part-time employment surged by 49,000.

“Employment quality was even more questionable considering statistical distortions. For yet another month, the ABS rotated its sample in favour of cohorts with higher full-time employment to population ratios,” noted Credit Suisse.

“There is a notable net upward bias to the full-time employment data since late 2016. In our view, this means that if we were to remove upward statistical biases, the decline in full-time employment in April would have been even greater than officially reported.”

Employment leading indicators, based on business and consumer confidence, as well as trend growth in loan approvals point to a near-term bottoming out in the labour market, the bank said.

However, the official data, thanks to the statistical problem, has stolen the march and shows the jobs market has already bottomed out and when the sample bias reverses, it could start throwing out some ugly numbers.

Credit Suisse is not alone in blaming the data. Commonwealth Bank of Australia economists said the jobs report left them scratching their heads and pointed to the fact the job additions over the last two months were the equivalent of 1.2 million increase in US non-farm payrolls over the same period.

“Our cash rate model currently points to one further cut,” Credit Suisse analysts said.

“However, because of our belief that full-time employment gains have been significantly overstated, we think that our output gap proxy understates the amount of slack in the economy. We remain of the view that the RBA needs to cut rates multiple times this year.”