Fresh doubts over rate cuts arise from ‘unquestionably strong’ jobs data

Economists have varied interpretations of what the latest unemployment data means for the RBA’s monetary policy easing cycle.

The unemployment rate came in slightly tighter in September at 4.1 per cent, but employment growth remained ahead of market expectations for a second month in a row at 64,000.

While consensus was for an unemployment rate of 4.2 per cent, employment was expected to peak at around 25,000. This marks the sixth consecutive month when net job creation has surprised the market to the upside.

Commenting on the data, CBA’s Gareth Aird said that the bank’s forecast for the RBA to begin monetary policy easing in December is now beginning to look “less likely”.

“Overall, the recent labour market data does not strengthen the case for the RBA to commence normalising the cash rate this calendar year. Indeed, at the margin it weakens it,” Aird said.

“That means the conviction we have in our call for a 25 bp December cut to the cash rate has dipped today.”

While the risk for a later start date to rate cuts has firmly shifted, according to the economist, CBA is choosing to stick to its original call.

“The RBA has the dual mandate of price stability, as defined by the 2–3 per cent inflation target, and full employment. There is no numerical target around what constitutes full employment. Instead, full employment is the current maximum level of employment that is consistent with low and stable inflation,” he said.

Given the uncertainty surrounding the RBA’s point estimate of the non-accelerating inflation rate of unemployment, CBA expects the central bank will rely on inflation and wage data to gauge where full employment might realistically lie.

“This process is somewhat of an experiment that is being conducted in real time. As such, it makes the job for policymakers a little more complicated than usual,” Aird said.

“We stick with our base case for a 25 bp rate cut at the December board meeting. But we acknowledge that the board will feel less compelled to start the process of normalising the cash rate while the labour market data remains robust.”

On the other hand, HSBC’s chief economist Paul Bloxham said that the latest jobs print adds to the growing risk the “RBA may miss the easing phase altogether”.

“Today’s labour market figures suggest the jobs market remains unquestionably strong. The figures delivered another significant upside surprise to employment, the participation rate rose to yet another all-time high, and the unemployment rate was at 4.1 per cent,” Bloxham said.

“For the RBA, the strength of continued job creation is an upside surprise relative to its most recent set of forecasts.”

Namely, the central bank had been forecasting employment growth to slow to 1.9 per cent year on year in 4Q24, and the unemployment rate to rise to 4.3 per cent by the fourth quarter. But, according to Bloxham, both scenarios are now unlikely.

“Given this, we expect the RBA to remain firmly on hold”, the economist said, noting that this month’s CPI reading will be the next key data point to watch out for.

HSBC’s base case is that the RBA does not begin to cut until 2Q25.

“However, the strength of the labour market adds to the risk that it could take even longer for the RBA to cut, or that they are not able to cut at all. We see a growing risk that the RBA may miss the easing phase altogether, and today’s numbers add to that risk,” Bloxham said.

Rate cuts delayed, not denied

According to Betashares’ chief economist David Bassanese, Thursday’s stronger-than-expected labour force data does not rule out a rate cut, but it does rule out near-term rate cuts.

“Instead, it leaves the decision over when rates will be cut crucially dependent on how quickly inflation falls,” Bassanese said.

On the plus side, he said that Australia faces the prospect of eventual rate cuts from falling inflation as opposed to overly weak economic growth, auguring well for both equity and bond market returns over the coming year.

“My base case remains that the RBA will be able to cut rates by February next year, following confirmation of the trend lower in underlying inflation in the next two quarterly CPI reports,” the economist said.

However, this would require annual trimmed mean inflation by the December quarter CPI data – to be released in January – to have fallen to 3.5 per cent or less.

At the same time, Bassanese pointed to a growing risk of rate cuts coming from the RBA from as early as November or December if the faster pace of declining inflation in the latest monthly CPI report continues.

“In the past three months, annual trimmed mean inflation in the monthly CPI report has fallen from 4.4 per cent in May to 3.4 per cent by August,” he said.

“At this pace, annual trimmed mean inflation in the monthly reports could be within the RBA’s 2–3 per cent target band by the October monthly report due on 27 November, opening up the tantalising prospect of a pre-Christmas rate cut at the 9–10 December policy meeting.”