Unemployment rate could rise beyond RBA’s comfort level, warn economists

Economists have warned the Reserve Bank that a rate hike, or prolonged delay in cutting rates, would be a “policy mistake”.

Asset manager State Street Global Advisors has warned that while recent data suggests there may be inflation upside risks in Australia, the economy is at a tipping point where unemployment could rise above the Reserve Bank’s comfort levels.

State Street Global Advisors APAC economist Krishna Bhimavarapu said the labour market appears to be cooling fast, which could drive inflation into the RBA’s target range this year, sooner than their forecast.

“We still think a rate hike will be a policy mistake, as the economy is at a tipping point, where the unemployment rate could rise beyond their comfort level,” Bhimavarapu said.

“Either way, with already feeble growth, the RBA will do well to exercise caution on their policy and proactively guide markets on their outlook.”

Bhimavarapu said the RBA is facing a unique conundrum regarding interest rates.

“Over the last six months, the narrative for monetary policy has remained on the hawkish side in Australia, as opposed to advanced stage discussions on rate cuts in other advanced economies,” said Bhimavarapu.

“The primary reason is unfavourable data developments, often clouded by seasonality and one-off factors. This lack of clarity in the data is reflected in the futures pricing of the RBA’s cash rate, which has a poor record of forecasting the RBA’s actual rate decisions.”

State Street said recent analysis indicates that the Australian labour market is at an inflexion point.

Deloitte Access Economics partner Stephen Smith said the June quarter inflation data and the rate of economic growth for the June quarter will be critical for Reserve Bank decisions over the next few months.

On the back of these events, two clear alternatives are possible, and each would set very different trajectories for our economy over the year ahead, warned Smith.

“Down one road, a high June quarter trimmed mean inflation result could force the hand of the RBA to lift interest rates once more in early August, further crushing household and business confidence and wiping out the benefits of tax cuts and real wage gains in the second half of 2024,” Smith said.

“Down the other road, the June quarter inflation result may be more benign, consistent with the slower pace of growth in the Australian economy. That would see the RBA hold interest rates steady again next month, enabling households to lead a steady recovery in economic growth in 2024–25.”

Deloitte Access Economics partner Cathryn Lee said interest rates should not be increased from here.

“That has been our consistent view for some time, for several reasons,” she said.

“First, interest rates at their current level are restrictive. Second, inflation is retreating towards the target, albeit not as quickly as might have been hoped. Third, further interest rate increases are unlikely to temper price growth any more meaningfully than would otherwise be the case.

“And finally, the surge of post-pandemic inflation hit Australia later than it hit other economies and has cooled earlier elsewhere as well. That has enabled short-term interest rates to be cut in several economies while the prospect of lower policy rates in the United States and New Zealand has also strengthened notably in recent weeks.”