RBA faces ‘challenging conundrum’ for August rate decision

In trend terms, employment grew 0.2 per cent, while the trend unemployment rate also remained at 4.4 per cent.

However, a parallel jump in labour supply, driven by a 0.3 percentage point bounce in the participation rate to 67.0 per cent, left the official unemployment rate steady at 4.4 per cent. This is above the RBA’s May Statement on Monetary Policy forecast of 4.2 per cent.

While the combination of stronger-than-expected job growth alongside rising labour market slack hasn’t changed the rate forecasts of Australia’s big four bank economists, they have suggested that the new figures will provide the central bank with an interesting conundrum.

CBA expects RBA on hold amid ‘wild swings’

The Commonwealth Bank of Australia (CBA) predicts the RBA will keep interest rates unchanged at its August meeting (11 August) while it weighs mixed domestic data against escalating geopolitical risks.

CBA senior economist Belinda Allen highlighted the conundrum facing policymakers in an economic update on Thursday and said: “There were some volatile movements in the June labour force data. Employment growth well exceeded both ours and market expectations.

“The focus should remain on the unemployment rate given the wild swings in employment and the participation rate. The unemployment rate held steady at 4.4 per cent on a seasonally adjusted basis, and also trend basis.

“The RBA Board next meet in less than three weeks and face a challenging conundrum given the mixed data flow in Australia, the escalation of the war in Iran and the potential impact on inflation.”

Nevertheless, CBA continues to forecast that the RBA will hold the cash rate at 4.35 per cent.

“We see the RBA on hold in August (pending next week’s CPI print) and see little change because of today’s labour force figures given the unchanged unemployment rate,” Allen said.

NAB notes reduced tightness

National Australia Bank (NAB) also expects the central bank to leave the cash rate on hold next month, as a higher average quarterly unemployment rate points toward easing labour market tightness despite the eye-watering job growth.

NAB senior economist Taylor Nugent noted that the unemployment and underemployment have trended a little higher, “but the surge in employment growth means the employment to population ratio is no longer trending lower”.

He said that while the 4.4 per cent unemployment rate pointed to a marginal easing in labour conditions, the sheer size of job creation complicates the picture for the central bank.

“The June data completes Q2 and shows the unemployment rate averaged 4.4 per cent over the quarter, above the RBA’s May forecast of 4.2 per cent,” Nugent said.

“Both the unemployment rate and underemployment rate have broken above their recent ranges this quarter. Combined with signs of easing labour constraints and capacity utilisation in the NAB Business Survey, that leans towards a marginal easing in the RBA’s assessment of labour market tightness. That said, the surprising strength in employment growth will appropriately limit how much signal they can take from those developments.”

The bank believes that while inflation risks are elevated, the slowing activity backdrop is enough for the RBA to hold rates steady this year.

“Looking further ahead, fading inflation risks and a domestic environment that is less capacity and labour constrained provides the space for gradual policy normalisation from mid next year,” the bank said.

ANZ: November rate hike not ruled out

Australia and New Zealand Banking Group (ANZ) is also still backing a cash rate hold in August, but warned that a November cash rate hike has not been ruled out.

ANZ economists Aaron Luk and Jasmine Zheng said: “We think the key takeaway from the unemployment release is the steady unemployment rate, which provides a better signal of underlying labour market conditions than the headline employment gain.

“We expect the RBA to look through the strong employment gain, given the volatility in the data, and instead focus on the unemployment rate, inflation and the geopolitical environment.”

The economists added that while an August move is unlikely, the RBA could still act if inflation remains elevated later in the year.

“The data is unlikely to rule out the possibility of a further increase in interest rates if inflation risks remain elevated. At this stage, we assess the conditions to be broadly steady, and from the RBA’s perspective, the labour market is unlikely to be a source of concern that would prevent additional policy tightening,” Luk and Zheng said.

“While we expect the cash rate to have peaked at 4.35 per cent, we do not rule out ongoing price pressures to push the RBA into a rate hike in November, assuming the August meeting sees no rate change from the board.”

Westpac stands alone in calling August rate hike

In contrast to its peers, Westpac continues to forecast that the RBA will raise the cash rate at its August meeting, viewing expanding labour supply and ongoing cost-of-living pressures as signs of persistent inflation risk.

Westpac economist Ryan Wells said the data reinforced the view that labour supply is expanding rapidly enough to absorb new job entrants, creating broader slack in the market.

“The headline results surprised materially to the upside in June, jumping +76.3k following a couple of volatile readings over April (-38.6k) and May (+44.0k),” Wells said.

“The strength in employment was matched by a sizeable lift in labour supply, which drove a 0.3ppt bounce in the participation rate to 67.0 per cent... since the increase in employment was driven by new entrants into the labour force, the unemployment rate held steady at 4.4 per cent.”

Wells added that the ongoing lift in participation could mean the central bank is misjudging the level of spare capacity in comparison to its official projections.

“Labour force participation has generally held up better than employment, resulting in the unemployment rate continuing to drift higher. This will come as more of a surprise for the RBA, given the unemployment rate averaged 4.4 per cent in Q2 (and was close to rounding up to 4.5 per cent), well above the RBA’s forecast of 4.2 per cent from the May Statement of Monetary Policy,” he said.

“This is one of the major points of difference between our forecasts and the RBA’s. The RBA has a more pessimistic view on labour force participation, which helps explain why it expects a more gradual rise in unemployment than we do.

“If participation continues to track around, or above, our view – and therefore well above the RBA’s – then the central bank may be underestimating both the amount of slack that can emerge through stronger labour supply and the economy’s potential output growth.”

The Monetary Policy Board will next meet on 10–11 August, with the cash rate decision announced at 2:30pm on 11 August.

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