The Official Cash Rate remains steady at
the record low of 1.5 percent in Australia, with the Reserve Bank of Australia
(RBA) having maintained its neutral stance for 30 long months. While most
analysts have been expecting rates to rise before they fall, low jobs and wages
growth may be enough to change the RBA's perspective. With inflation sitting at
its lowest level since the third quarter of 2017 and employment conditions
weakening, there are now multiple scenarios on the table for the RBA depending
on what the economy does next.
There is an intimate link between interest
rates and inflation, with more jobs and higher wages leading to more money in
the economy and the possibility of a rate decrease in order to slow down the
economy. On the other side of the coin, more unemployment or softer wages
growth often leads to decreased consumer spending and the possibility of lower
interest rates. The current level of inflation in Australia is 1.9 percent
year-on-year, which is slightly below the 2-3 percent target set by the RBA.
While the RBA has been steady with an eye
to increasing rates in recent months, their sentiment was noticeably changed in
the latest announcement based on weak recent employment figures. While
employment has grown by 2.2 percent over the last year, and 39,000 new jobs
were created in January, the unemployment rate can't seem to drop below 5
percent. A number of analysts have noticed a weakening in employment conditions
as big employment sectors such as retail and construction head further into
According to Matthew Hassan from Westpac,
"The leading indicators are softening but they are not pointing to a
collapse in employment - at this stage... We believe that employment growth is
set to stall through the first half of 2019 but our 5,000 [jobs lost] forecast
for February is more about monthly volatility than the start of a new trend...
The shift is clearly starting to affect businesses willingness to hire and
invest." said Mr Hassan, adding "Both job loss concerns and rising
risk aversion raise the risk of a further move by households to rein in
spending and increase savings, all of which would be consistent with our
expectation of a significant 'wealth effect' drag on demand."
Westpac's consumer survey has also turned
pessimistic, due mostly to renewed concerns about job security. Westpac
economists have already come out saying they think the central bank will cut
the official interest rate by a total of 50 basis points in 2019, which would
bring it down to 1 percent. With the ANZ job ads series also pointing towards
low employment growth at less than 2 percent, pessimism based on a weak jobs
market seems to be catching. While most analysts are expecting a smaller drop
of 25 basis points in August this year, a lot will depend on employment figures
between now and then.
According to RBA Governor Philip Lowe, the
current neutral stance of the RBA could be altered to drop rates if and when
needed: “With monetary policy already providing considerable support to the Australian
economy, it is appropriate to maintain the current policy setting while we
assess developments... Much will depend on what happens in our labour market...
We have the flexibility to do this if needed. We are not on a predetermined
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