RBA Observes Labor Market for Economic Strength Signals
Australia’s central bank is closely watching the labor market, as its persistent tightness may indicate a stronger underlying economic impulse. Reserve Bank of Australia (RBA) Governor Michele Bullock emphasized that policymakers are not “pre-committed” to any specific path for interest rates.
“The board is committed to being guided by the incoming data and our evolving assessment of the risks,” Bullock stated while addressing a parliamentary panel in Canberra on Friday.
She acknowledged that strong employment growth is a positive sign for job seekers but warned that it could also delay or derail the disinflation process.
RBA Cuts Interest Rate Amid Inflation Concerns
Earlier this week, the Reserve Bank board decided to cut the cash rate for the first time in over four years, bringing it down to 4.1%. This move aligns with global central banks initiating an easing cycle. However, despite the rate cut, Bullock reiterated concerns over core inflation, which remains at 3.2%, above the RBA’s target range.
Employment and Wage Data Indicate a Mixed Economic Outlook
Recent employment data for January showed stronger-than-expected hiring, while the unemployment rate slightly increased to 4.1%. Additionally, fourth-quarter wage growth data revealed a slowdown, indicating that the tight labor market has not yet fueled wage-price inflation.
In her opening statement, Bullock emphasized the RBA’s cautious approach:
We have not pre-committed to any particular course of action on interest rates. But in the forecasts published this week, the central projection suggests that if monetary policy is eased too quickly or by too much, disinflation could stall and inflation would settle above the midpoint of the target range.
Inflation and Future Rate Cut Projections
The RBA’s latest forecasts project trimmed mean inflation easing to 2.7% by mid-2025 and remaining there through mid-2027. These projections were based on market expectations of three rate cuts in 2024, including the one already implemented.
However, financial markets have adjusted their expectations, now fully pricing in just one more cut, with the probability of a third reduction dropping to below 70%. This shift follows comments from top RBA officials, which traders perceived as hawkish.
RBA’s Cautious Approach Moving Forward
On Thursday, Deputy Governor Andrew Hauser mentioned in an interview with Bloomberg that the RBA’s rate-setting board considered an alternate scenario. If interest rates had remained unchanged throughout the year, core inflation could have dropped below the 2.5% midpoint of the central bank’s 2-3% target range.
Reiterating the RBA’s cautious stance, Bullock concluded:
“The board remains cautious about prospects for further policy easing.”
The central bank’s decision-making will continue to be guided by incoming economic data, with a focus on balancing inflation control and economic growth.