October rate cut awaits as unemployment rises

20 September 2019

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The Reserve Bank is set to cut the cash rate for the third time in four months with the unemployment rate continuing to climb, according to ANZ Research.

The Australian Bureau of Statistics (ABS) has released its latest Labour Force data, reporting a rise in the unemployment rate, from 5.2 per cent in July to 5.3 per cent in August – above market expectations (5.2 per cent).

The underemployment rate also increased, rising from 8.4 per cent to 8.6 per cent.

According to senior economist at ANZ Research Felicity Emmett, the “tick-up” in unemployment would place further pressure on the Reserve Bank of Australia (RBA) to cut the cash rate further, with its back-to-back cuts in June and July primarily aimed at stimulating the labour market.

“Leading indicators point to a further deterioration in the labour market over coming months,” Ms Emmett said.

“Employment growth looks set to slow, and we expect that the unemployment rate will rise to a peak of 5.4 per cent in [fourth quarter] of this year.

“This will keep the RBA in easing mode, and we continue to expect the next rate cut at the October meeting.”

AMP Capital chief economist Shane Oliver agreed, adding that the latest data indicates that “significant spare capacity remains in the labour market”.

“Against this background, it’s hard to see wages growth improving any time soon,” he added.

“While the RBA rate and tax cuts to date should help limit the rise in unemployment to around 5.5 per cent, they are unlikely to be enough to get unemployment down to the 4.5 per cent or less needed to see stronger wages growth and higher inflation.

“[In] the meantime, the risks to global growth have increased.”

Mr Oliver concluded; “As a result, we remain of the view that the RBA will have to cut rates further and continue to see the next 0.25 per cent cut coming in October, followed by another cut in November, ultimately taking the cash rate down to 0.5 per cent.”