Higher Q3 inflation should see the RBA raise rates
The very tight labour market is still easing a little, ahead of key inflation data next week.
Higher Q3 underlying inflation should justify a rate hike in November.
The RBA will update its economic outlook over the next week or two and it seems likely that the staff will revise its near-term forecasts for the labour market in the Statement on Monetary Policy, which has performed better than it had anticipated (see the detail of the September labour force survey below).
The Q4 2023 forecast for the unemployment rate seems likely to be revised down from 3.9% to 3.6-3.7%, while the staff should nudge up the end-year forecast for annual employment growth from 2.3% to 2.4-2.5%.
There are still signs, though, that the labour market broadly peaked some time ago and should loosen over coming months, albeit much later than what the historical relationship with higher interest rates had suggested.
For example, hours worked have fallen after recent unprecedented strength, the participation rate has edged down from a record high, full-time jobs have been weak as part-time employment has picked up, and job vacancies have fallen for some time now from their highest level in decades.
On balance, though, the labour market still remains very tight and Governor Bullock has recently expressed concern about upside risks to inflation, reinforcing the message from the October minutes, which noted that "the board has a low tolerance for a slower return of inflation to target than currently expected".
This suggests that a faster-than-expected increase in next week's Q3 trimmed mean CPI seems likely to trigger another rate hike in November (the monthly CPI in the quarter to date suggests that the trimmed mean CPI will increase by 1.1-1.2% in Q3, compared with the RBA’s implied forecast of 0.9%).
Aside from the CPI outcome itself, where the mapping from the monthly to the quarterly trimmed mean CPI is not precise, a key uncertainty around this view relates to whether Governor Bullock will follow in the footsteps of her predecessor, whose cautious action on interest rates fell well short of his tough language on inflation (note also that Governor Bullock speaks the evening before the Wednesday release of the CPI at an investment conference).
Detail of the labour force survey:
The national unemployment rate edged down to 3.6% in September on flattish employment
- Australia’s unemployment rate edged down to 3.6% in September, which is still in the 3.4 to 3.7% range that has prevailed since June last year. Regionally, unemployment ranges from the low 3s to almost 4% in the mainland states.
- Employment was broadly unchanged after surging by 0.5% in August and after a flat July. Part-time jobs posted another strong rise, up about 1% in the month, while full-time employment fell by about ½%.
- Total hours worked, which are much are more volatile than employment, fell again in September, down about 1% in Q3 after spiking by 2¾% in Q2.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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