An unexpected drop in the unemployment rate gives rise to the possibility that the Reserve Bank of Australia (RBA) may delay any reductions in interest rates. The jobs market in Australia shown a spectacular comeback over the previous month, reducing the need to the RBA to look at interest rate easing that may induce higher inflation.
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The Australian Bureau of Statistics (ABS) revealed on Thursday that the economy added a staggering 116,500 jobs in February, which is far above the average of 40,000 jobs that was expected to be added during that month and above lows previously seen during the main COVID business interruption time frames. This unanticipated rise in employment was driven by an increase in both full-time and part-time roles, which saw an increase of 78,200 and 38,300 respectively.
Following an increase in the number of job losses that occurred throughout the summer months, experts had projected that the unemployment rate would be somewhere around 4%. However, the surprise outcome reduced the unemployment rate down to just 3.7%, evidencing a significant decrease from the previous month’s figure of 4.1%. While a few points of a percentage point may not seem like much, when applied over the nation wide economy, these can have quite an effect.
Employment Figures
An increase in the participation rate, which is the percentage of Australia’s working-age population that is either employed or searching for work, contributed to the decline in the unemployment rate. According to the seasonally adjusted numbers, the participation rate reached a near-record high of 66.7 percent, showing evidence of an amount higher than any previous recent record(s).
In Australia, the number of hours worked increased by 53 million hours, which is equivalent to 2.8 percent, to 1.9 billion hours. This increase occurred as more people began new employment, took on additional hours, and returned from the Christmas break. This also assisted in bolstering employment figures, as higher participation rates with hours worked showed that not only are more people in work, but there is a meaningful up tick in overall employment needs for business.
The underemployment rate, which is a measurement of individuals who are employed but are searching for more hours, also decreased to 6.6%, showing a decrease from 6.7% in January.
Markers For Rate Cuts
The rebound in employment obviously challenges the assumption that monetary policy was exerting sufficient of a drag on the economy to keep down wage growth and inflation. From this vantage point, the Reserve Bank of Australia (RBA) will undoubtedly be keeping a close eye on the statistics pertaining to the labour market in order to determine whether or not the labour market will restart its loosening in the months to come.
The Reserve Bank of Australia (RBA) stated earlier this week that the central bank was keeping a close eye on indicators of the jobs market, but that it was not targeting a particular unemployment rate before it decreased interest rates. This statement came after the RBA had previously maintained the cash rate at 4.35 percent and shows a glimpse that the RBA is likely to consider multiple factors, not just the inflation and/or jobs rate, in deciding any possible future interest rate drop. Based on the Reserve Bank’s own projections, it is anticipated that the unemployment rate would only gradually increase, reaching 4.2 percent by the end of June and 4.3 percent by the end of the year.
Summary
With a healthy employment rate, and inflation figures coming down from recent highs, this shows that the arguments for a rate cut are lessened. Though many people may wish for a rate cut, unintended consequences could occur if this happens too early. This could cause possibly higher inflation rates, and businesses needing to look at reducing hours worked, if business costs increase but revenue figures do not; leading to eventual high unemployment figures. With this, the RBA is likely to take a longer term wait and see approach to the official cash rate.
