RBA ‘likely’ to hike in July and August as employment rises

New labour market figures from the Australian Bureau of Statistics, released on Thursday (15 June), have revealed that the unemployment rate in Australia decreased by 0.1 percentage point to 3.6 per cent (in seasonally adjusted terms) in May.

The increase in employment means that the number of employed people in Australia reached 14 million for the first time.

According to Bjorn Jarvis, the head of labour statistics at the Australian Bureau of Statistics (ABS), the decline in the unemployment rate was driven by an increase in employment and a decrease in the number of unemployed individuals.

He stated: “With employment increasing by around 76,000 people and the number of unemployed decreasing by 17,000, the unemployment rate fell to 3.6 per cent.”

In trend terms, the unemployment rate remained at 3.5 per cent for the 10th consecutive month, after earlier data was revised down slightly.

Given the strong employment figures, ANZ’s head of Australian economics, Adam Boyton, has forecast that “a July rate hike from the RBA is more likely than not”.

Moreover, he said that he now sees sufficient risk that the Reserve Bank of Australia (RBA) will need to increase rates beyond 4.35 per cent, which had been ANZ’s terminal cash rate forecast.

“As a result, we also look for a hike in August. That would bring that cash rate to 4.60 per cent,” the ANZ economist said.

“While the weakness in Q1 GDP suggests the pace of jobs growth should moderate — and by a lot — over coming months, the general robustness of the Labour Force survey over 2023 to date is undeniable and suggests some ongoing momentum in the economy.”

The head of economics at Commonwealth Bank of Australia, Gareth Aird, also suggested that the RBA may hike in both July and August.

While CBA had previously backed a final 25-bp rate increase in August — taking the cash rate to a peak of 4.35 per cent — Mr Aird said the strong employment figures mean that a 25 bps in July “now looks like a 50/50 proposition”.

However, he said CBA would wait for the monthly May consumer price index indicator, due for release on 28 June, before finalising its July rate call.

CBA had previously forecast the increase in employment for May to be around 20,000, rather than 76,000.

“The RBA meeting in July is clearly ‘live’ and the labour force survey today sees us put the odds of a 25-bp increase in the cash rate at 50 per cent. The RBA is aware of the lag between slowing spend and the impact it has on the unemployment rate,” he said.

“That all said, patience within the RBA board for a more material loosening in the labour market is likely to be wearing thin given they recently ramped up their concerns around the outlook for higher wages growth and more persistent services inflation.

“Only around half of the RBA’s already delivered 400 bps of policy tightening has hit the household sector. So there is plenty more tightening built into the system.

“But the [RBA] board might feel the policy response of least regret at this stage is to pull the rate hike trigger again in July.”

Westpac also noted that the total employment gain in May was much stronger than they had anticipated (76,000 compared to Westpac’s top-of-the-market forecast of a 40,000 gain) but stressed that “some level of caution is warranted in the interpretation of the May results”.

Westpac associate Ryan Wells elaborated: “The prior survey, in April, reported a surprise decline in employment of –4.0k and a rise in the unemployment rate from 3.5 per cent to 3.7 per cent.

“However, we noted that the April 2023 survey is among a small set of years in which the survey period fully coincided with all Easter holidays (as opposed to only a partial overlap).”

Indeed, this has only happened three other times over the last 20 years.

Mr Wells added: “However, even in taking this into account the May Labour Force Survey provided a stronger-than-expected update, as evinced by average monthly employment gains remaining robust and the unemployment rate holding near historic lows, suggesting that if the labour market were softening, it is only doing so to a marginal degree.”

Westpac has previously said it expects a “follow-up move in July with risks of a further increase in August”, with chief economist Bill Evans stating: “Despite having increased the cash rate in both May and June we expect that a further rate hike will be required by the board in July, to really emphasise their commitment to the inflation objective.”

National Australia Bank (NAB), upped its terminal cash rate to 4.60 per cent earlier this week, before the labour market figures were released.

More women employed than ever before

The ABS Labour Force statistics showed strong growth in employment in May followed by a small decrease in April, around Easter, when employment fell more than usual over the holiday period.

However, looking at the past two months, the average increase in employment was around 36,000 additional employed people each month, which is consistent with the average over the past year.

Moreover, the employment-to-population ratio reached a record high of 64.5 per cent, with a 0.2 percentage point increase in May.

Nearly two-thirds (64.5 per cent) of people aged 15 years or older were employed in May, representing an increase of more than 2 percentage points since March 2020.

The participation rate, which measures the proportion of people either employed or actively seeking work, also increased by 0.1 percentage point to 66.9 per cent.

A greater share of women in Australia are now employed than ever before, with both their employment-to-population ratio and participation rate at record highs in May.

However, despite the positive employment figures, there was a decrease in monthly hours worked by 1.8 per cent on a seasonally adjusted basis. This followed a 2.7 per cent increase in April when fewer people were working reduced hours over the Easter period.

The ABS’ Mr Jarvis explained: “Even though hours worked fell in the latest month, their strength since late 2022, relative to employment growth, shows that the demand for labor in a tight market is being met, to some extent, by people working more hours.”

While underemployment (which measures the number of people who are employed but would like to work more hours) rose by 0.3 percentage points to 6.4 per cent in May, following a slight decrease in April., it is still low in historic terms, at around 2.3 percentage points lower than before the pandemic.

“Looking across the range of indicators — strong growth in hours worked, the elevated employment-to-population ratio and participation rate, along with the low unemployment and underemployment rates — they all point to a continuing tight labour market,” Mr Jarvis said.

[Related: NAB ups terminal cash rate forecast]