JACKSON HEWETT: RBA must cut interest rates, as Reserve Bank has no excuses after new unemployment figures

The RBA shocked pretty much everyone when it decided to keep rates on hold earlier this month.

Surely after today’s jobs data, which showed the highest level of unemployment since the pandemic, they have no excuse not to ease the taps.

Callam Pickering, APAC economist for job site Indeed said the call was “misguided” and that, in light of the jobs figures, “has aged like milk”.

“It was the wrong decision at the time and they surely won’t make the same mistake twice,” he said.

Australia’s record low unemployment has been one of the key reasons the Bank has acted so slowly in bringing interest rates down.

Governor Michele Bullock has regularly pointed to “labour market tightness” as an inflationary concern.

On today’s reading, that tightness is easing.

Australian Bureau of Statistics data revealed seasonally adjusted unemployment has ticked up to 4.3 per cent from 4.1 per cent, as 34,000 more people went looking for work.

The composition of the jobs data also revealed an economy which is sputtering.

It appears firms are trying to make do by putting on part time workers rather than full time.

“Part time employment grew by 40,000 people, offset by a 38,000 person fall in full time employment,” the ABS said.

Preferencing part time jobs over full time, doesn’t suggest a business sector that is ready to fire.

That weakness is consistent with what businesses themselves have been reporting.

According to NAB’s latest quarterly survey, business conditions have fallen to their lowest level since the 2020 pandemic shock. Trading and employment indices both slipped, dragging the overall conditions reading to zero, while profitability remained negative for the second straight quarter.

Forward-looking indicators weren’t much better. Capacity utilisation, a key measure of how much firms are using their existing resources, declined to 82.3 per cent and has been trending lower for more than a year. Forward orders remain below long-run averages, and while capital expenditure plans improved slightly, they remain subdued.

That is showing up in ABS data for hours worked, which fell 0.9 per cent in June, with full-time hours down 1.3 per cent.

NAB’s survey showed business is stuck in a cash flow vice.

The two most significant issues facing firms are wage costs and margin pressure.

The retail sector is particularly feeling that pain, feeling upward pressure on wholesale costs, and downward pressure on prices it can pass on.

That gap between input costs and retail prices is getting close to one per cent, with business profitability further squeezed.Under those conditions, committing to full-time hires would be commercially reckless.

So far, the Reserve Bank’s rate cuts have done little to entice consumers to open their wallets.

According to the big banks 90 per cent of mortgage holders are using those interest rate savings to pay down debt.

A few more rate cuts might finally start encouraging spending rather than saving.

Or it might not. With house prices forecast to rise by as much as 6 per cent this year, according to AMP’s Shane Oliver, first homebuyers will be scrimping like mad to get enough for a home deposit. Upsizers would hardly feel that much more confident, aware that as much as they are enjoying their spot on the property ladder, the next rung up is not getting any closer.

Earlier this month, the RBA said it was holding out for June quarter inflation data, a few weeks away, before it made the final call on cutting rates.

NAB’s survey suggests those numbers will be favourable to an interest rate cut. It showed retail price growth slowing to just 0.6 per cent over the quarter, its lowest rate since early 2021. Final product prices were flat at 0.4 per cent as firms met lacklustre consumer demand with lower margins.

It also found expectations for future wage costs were declining and inside the RBA’s target inflation range of two to three per cent.

This easing in the jobs figures would support that.

Fortunately the next rate decision is less than a month away and not a moment too soon.

Three members of the RBA board had already called for a cut, according to the Bank’s Statement of Monetary Policy, while the remaining 6 voting members were more concerned about “timing rather than direction”.

The domestic outlook, coupled with an uncertain global picture should sway those sitting on the fence.

“The global economic outlook has recently soured and Australia’s major trading partners are at the centre of it. There are tentative signs of labour market conditions softening, economic growth is mediocre and inflation is increasingly benign,” Mr Pickering said.

“The RBA will need to cut rates at least another couple of times this year to provide sufficient support to households and businesses, while ensuring that the unemployment rate remains low and we avoid recession.”

Markets were 97 per cent sure rates would be cut at the start of this month. That will bounce to 100 per cent based on these numbers.