Wednesday, 9 November 2011

A rate cut in December - all but certain. But will it be 25 or 50?

Today’s labour force data all but lock in a further interest rate cut at the December meeting of the RBA Board. The debate will likely be whether to go 50bps or just 25bps.

In summary – employment is just 6,300 above the March level. Blunt analysis shows that on average, for the past 7 months, fewer than 1,000 jobs per month have been created.

Full-time jobs in that 7 months have actually fallen 35,000. That’s a net loss of 5,000 full-time jobs per month, every month, over the past 7 months. We are seeing a switch from full-time (high take home pay) jobs to part-time jobs. Not a sign of labour market tightness, whichever way you cut the data.

The labour market is soft and without remedial action (ie rate cuts), it could weaken to a point that undermines household debt management and house prices and all those ugly things that happened in the US and UK.

The case for a 50bp cut revolves around the dire global outlook, market ructions and takes account of the fact that the RBA does not have a scheduled meeting in January meaning monetary policy will likely be on hold from early December to early February. Also, the 4.5% cash rate right now is still quite high and there seems to be some need for the banks to rebuild margins. If the RBA wants to give a meaningful boost to retail borrowers, it may have to go 50bps with 35 or 40 for the punters and 10 or 15 for the banks.

And as RBA Governor Glenn Stevens likes to opine, what is the path of least regret for monetary policy settings? Do too little when it’s plain that 2012 will be a tough year for the economy and low inflation is baked in the cake? Will you regret being too hawkish with inflation low and the labour market weakening? Will you regret ignoring these risks only to find you have to catch up with more aggressive cuts during 2012?

The Australian economy is not heading to hell in a hand basket, but it does face serious downside risks and inflation is a dead duck.

Right now, the case for a 50bp cut in December is solid, even though a 25bp cut is more likely. It will be a close call. There are still plenty of indicators between now and the RBA Board meeting on 6 December that will help determine what the RBA will do. The wages data next week are a standout – but global events will swamp local news.


  1. Some careful cherry-picking of data going on there! You've selected seasonally adjusted figures for March this year as your starting point. Had you gone to Feb instead your data would be very different (ie 52,200 new jobs at a rate of over 6,500 per month and 3,600 extra full time jobs).
    In their release today the ABS makes particular note of some very dodgy seasonal data from Queensland and recommends the use of the Trend data. Doing so, and using your preferred March start date, still shows a different picture again (ie 20,600 new jobs at a rate of almost 3,000 per month with 5,300 less full time jobs).
    If we take Trend data from a Feb start then employment is up 23,600 at a rate of 2,950 a month with 1,200 fewer full time jobs.
    Either way you look at it (other than the way you've chosen to!) things don't look too bad.

  2. Mr/Ms Business - You seem to be cherry picking the data by starting in February!

    My preference is to look at the health of the labour market by looking at some 6 or 12 month averages - and only when I see 15,000 jobs being created a month on average do I conclude that things don't look too bad.

    We are risking some unhealthy labour market data unless the RBA keeps easing rates.

  3. I agree; we should be looking at a longer term trend. So let's do that.
    Employment is 87,300 above the level in Oct last year. Blunt analysis shows that on average for the last 12 months 7,275 per month have been created. Full time jobs in those 12 months are up 60,900. That's a net gain of over 5000 full time jobs every month for the past 12 months. (ABS Trend data)
    But I guess that's not quite the story you want to paint.
    15,000 new jobs a month would be wonderful...but with unemployment only a touch over 5% that seems like a big ask.
    By the way, it's Mr Business, but you can call me Conus.

  4. Fair points: I also look at the ever reliable job ads data and they are pointing to a slowing in job creation. As mentioned, the economy is not stuffed, but as things slow, we need our friends in Martin Place to put a bit of juice into activity.


  5. Hi Stephen, good call for December, and congrats on the November call. Personally I think they should have started cutting in October. I agree with CJ on most things but I have disagreed with his interest rate hawkishness for a while.

    I quoted your blog post on APF today. hope you don't mind...

    The Kouk on Dec Rate Cuts

    What are your thoughts on how the housing market will react in 2010 to the rate cuts?



  6. Thanks Shadow - go for it.

    For housing, lower interest rates will clearly help, and there still seems to be a housing shortage in many places. That said, with confidence subdued, the labour market softish and many people suffering from weak or falling asset prices, any rebound should be moderate.

    I also would think that the next housing price uptick is when the RBA finishes its cutting cycle - when is that? Wow - not sure, but would guess end 2012 / early 2013.