RBA on hold, but for how long? RBA on hold, but for how long? RBA on hold, but for how long?

RBA on hold, but for how long?

Macro 4 minutes to read

Summary:  The RBA held back from easing policy on Tuesday this week, as ever, adamant that positive momentum in the labour market will result in wage pressure and inflation returning to its target range.

Despite this week’s defiance, interest rate cuts are inevitable in our view. 

The Reserve Bank of Australia has consistently pointed to strength in the labour market providing a source of comfort to the economic outlook in Australia. The RBA stated in its board meeting minutes earlier this month that “Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances,". Here the RBA clearly stated the conditions for cutting the cash rate – inflation remains lower than expected and that the trend in unemployment starting to rise. Despite weak and decelerating inflationary pressures, following solid employment growth in Q1 and high vacancy rates, we took the RBA on their word and forecast a hold on the official cash rate. 

But following Tuesday’s decision, the RBA is saying a further improvement in the labour market will be required to return inflation to its mandated target range. Tuesday’s statement said, “further improvement in the labour market was likely to be needed for inflation to be consistent with the target.” Likely a reflection of the fact that the current underutilisation rate is too high to present enough wage price pressure to materially boost wages. 

However, this is statement is somewhat ambiguous and has left market participants second guessing whether the RBA’s reaction function has shifted. Has the hurdle for a cut changed, and does this mean the RBA now needs to see the unemployment rate falling (not steady) to avoid cutting rates?

Given the lack of clarity, next Tuesday will be an important day for RBA watchers, Governor Lowe’s speech could be vital in resolving the current confusion. The minutes of last week’s May monetary policy meeting will also be released on the same day, so current ambiguity could be rectified in the minutes also.  

Until then all eyes will be on the labour market as the RBA have cited that labour market is the crucial to the outlook for monetary policy. This places the labour market data for April (16 May) and wages data for Q1 (15 May) in the spotlight this week. 

Even if the new hurdle to cut the cash rate is that the unemployment rate no longer needs to rise, given that the RBA have been so reluctant to ease they will likely need clear signs it is no longer falling. This means 2 or 3 months of labour market data might be needed to confirm the flat trend after robust employment growth in Q1, so cuts are unlikely to be imminent, given that labour market data is notoriously volatile. The standard error on the change in employment each month is around ±30,000. By that time flagging growth momentum and the weakness pointed to by several leading indicators may have caught up with the labour market already.

Although not imminent, it is likely an inevitability that the RBA will need to move to cut rates twice in the second half of this year. The RBA remain too optimistic about the domestic outlook and easier monetary policy may be unavoidable. The RBA is operating policy in the rear-view mirror as the unemployment rate is a lagging indicator of economic activity, the slowdown in growth since the second half of last year takes businesses time to respond to. Several leading indicators are pointing to a slowdown in hiring ahead; ANZ job ads and NAB business survey capacity utilisation (pictured below).

The AIG PMI employment sub-indices also illustrate that weakness in hiring could be just around the corner. It is likely only a matter of time before the upcoming softness implied in leading indicators creeps into the labour market. Persistent sub-trend growth will eventually lead to a slowdown in hiring and pick up in unemployment. 

Another problem is that construction is one of the largest employment sectors, making up nearly one in 10 jobs in Victoria and New South Wales. As residential construction activity deteriorates over the coming months, this will hit jobs. Employment will not continue to hold up as confidence is eroded and growth continues to lose momentum. As unemployment trends higher, the RBA’s hand will be forced, albeit reluctantly, as inflationary pressures remain weak and growth is below trend. 

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.