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.