Australia's low unemployment rate is unlikely to influence the Reserve Bank of Australia's (RBA) next monetary policy decision on interest rates – at least not for now, said Madeline Dunk (pictured), an economist at ANZ Bank. Bigger risks, the Sydney-based economist said, stem from geopolitical tensions abroad.
"The RBA definitely looks at the employment data and the labor force survey, but they would need to see a few prints to know that this was the start of a trend showing some weakness in the labour force survey. One month of data isn't likely to change the RBA's view on the outlook," Dunk told Australian Broker. "If they start to see two or three months of data, then maybe they can begin to form some sort of trend. But if we look at the forward indicators, things like job ads or job vacancies, they aren't showing any signs that the labor market is going to roll over. It would be a surprise if this is the start of some softening in the labor market.
"But the bigger risks [to the economy] is what we're seeing offshore, with the policy uncertainty there, that flows through into the Australian market and Australian consumer and business confidence," she said.
On Thursday, the Australian Bureau of Statistics revealed that the nation's unemployment rate had held steady in February at 4.10%. While the month-to-month employment numbers can be volatile, the government agency pointed out that the participation rate had fallen slightly by 0.4% to 66.8%.
Either way, the central bank looks to both inflation data and employment figures to determine the direction of its next move on monetary policy.
In February, the bank lowered the official cash rate (OCR) for the first time in 15 months by 25 basis points to 4.10%. Some market participants were quick to assume more rate cuts were in store, potentially at the RBA's March 31-April 1 meeting. But low unemployment numbers might lead the bank to hold off on additional rate cuts.
Still, historically, as interest rates fall, both consumer confidence and borrowing capacities increase. But Dunk pointed out that since the February RBA announcement, ANZ's consumer confidence measures have fallen. Some of that, she said, can be attributed to the Ex-Tropical Cyclone Alfred in Queensland earlier this month.
"But potentially, global uncertainty is also weighing on consumer confidence," Dunk said. "Consumer confidence has been going sideways over the last couple of months, which is not what you would tend to expect when we've had a rate cut. After a rate cut, you would expect a big bounce in consumer confidence. But there's other factors that are weighing on how powerful [people] are feeling about the outlook."
Those other factors include global uncertainty over US President Donald Trump's sweeping – and unpredictable – tariffs. Also earlier this month, Trump's 25% tariffs on all aluminum and steel products imported into the US went into effect. No countries were exempt from the tariffs, including Australia. While Australian Prime Minister Anthony Albanese said Australia would not impose reciprocal tariffs, economic uncertainty persists around the globe.
Stateside, fears of a recession are mounting after all three major US indices fell this week. On Wednesday in the US, the US Federal Reserve kept its benchmark interest rate the same for the second meeting in a row, but trimmed its economic outlook, anticipating slower GDP growth than previously expected.
Fed Chair Jerome Powell cited a moderation in consumer spending and increased inflationary pressures as the reasons.
"Surveys of households and businesses point to heightened uncertainty about the economic outlook," Powell said during a press conference. "It remains to be seen how these developments might impact future spending and investment.
"Inflation has started to move up. We think partly in response to tariffs. And there may be a delay in further progress over the course of this year."
A slowdown in growth in the US would likely have widespread impacts on the global market, including Australia's economy, consumer confidence and property markets.
"In the face of all this uncertainty for businesses right now, it's probably a challenging environment to make clear decisions about how to allocate their capital. And for consumers, if we see a pullback in consumer spending, that of course is going to flow through to the US economy," Dunk said. "So the US is in this environment where inflation expectations are higher and people are more concerned about growth here.
"Initially, financial markets had baked in a kind of a goldilocks scenario for Trump," she said. "They thought that he would look after the economy and look after equities, and we were now seeing this realization that potentially, some of the downside risks to growth could materialize.
"In Australia, I think the big concern for us is if that flows through into our own consumer confidence and business confidence data. So far, we haven't seen signs of that. Progress in consumer confidence has stalled, but it hasn't fallen sharply. So I don't think there are signs that global uncertainty is feeding into consumer or business confidence yet. But if it did, that would be a risk for us here in Australia, and I think a bigger risk than the impact of direct tariffs on Australian exports."
"The economy is on track for a soft landing. Things are panning out pretty well," she said.
Last year, the RBA said it would not cut rates until inflation was within its target range of 2% and 3%. January's Consumer Price Index (CPI) set off a wave of optimism in the market after it was revealed that the CPI and trimmed mean inflation rates had both fallen since the previous reading. Inflation was up 2.4% for the year, but down from 2.8% at the previous quarterly reading. The "trimmed mean" fell to 3.2%, down from 3.6% in the September third quarter.
"Maybe a year ago, the RBA was talking a lot about how they wanted to walk a narrow path; where they wanted to bring inflation down, but they also wanted to keep people in their jobs," Dunk said. "And I think generally, they've tracked a narrow path pretty well.
"The unemployment rate has stayed low and we don't see lots of people losing their jobs," she said. "The private sector activity has been the weakest part of the economy, and we're seeing signs that it's rebounding. We've seen signs that spending is picking up. And the government is likely to continue to play a role in supporting the economy, and I think ultimately the local side of the economy looks pretty good."
"Our view is that the next rate cut will be in August," Dunk said. "The data hasn't shifted materially enough to justify a rate cut. And while there is uncertainty about the global outlook, I don't think it's at a point where you could see the RBA cutting rates at that April meeting.
"The RBA governor, Michele Bullock – when she talked in her press conference following the February post meeting statement, she talked a lot about how they were feeling cautious about the outlook, and really emphasized their need not to rush with future rate cuts," Dunk said. "So I think that they'll be taking a pretty cautious approach moving forward."
