(Bloomberg) — Australia’s central bank has been surprised by the “limited” easing this year in some key employment indicators, Assistant Governor Sarah Hunter said, reinforcing its view that the labor market is still operating above full capacity.
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“Conditions in the labor market have eased since late 2022, but our assessment is that the labor market is still tight relative to full employment,” Hunter told an economic forum in Sydney on Wednesday. “We also expect employment to continue to increase, but at a slower pace than population growth.”
That outlook is a major reason why the Reserve Bank has stuck to a hawkish stance in the face of a slowing local economy and as global counterparts either begin cutting interest rates or signal plans to do so. Governor Michele Bullock has said recently that monetary policy will need to remain “sufficiently restrictive” until inflation moves sustainably toward the RBA’s 2-3% target.
Hunter, who only joined the central bank at the start of the year, didn’t directly address the rate outlook in a speech titled “Understanding the Journey to Full Employment.”
The RBA has raised rates to a 12-year-high of 4.35% to try to gain control over inflation. In response, the economy has slowed to a crawl as households reined in spending, but employment has been surprisingly resilient with the jobless rate at a still-low 4.2%.
Hunter said the “limited signs of further easing” in average hours worked and the underemployment rate at a time of slowing economic growth “is somewhat surprising and is a key uncertainty in the outlook.”
The assistant governor expects measures of underutilization — including the unemployment rate — to continue rising gradually, before stabilizing as GDP growth picks up next year.
Forward indicators of labor demand such as job vacancies have cooled this year. A gauge of job advertisements released last week was down almost 23% in August from a year earlier.
“Our view is that further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate,” Hunter said.
Australia has a higher ratio of vacancies to unemployment by historical standards as well as relative to peer countries. That suggests “there is space for vacancies to fall further without a sharp increase in the unemployment rate,” she added.
While still low, Australia’s unemployment rate has risen half a percentage point over the past five months and is at the highest level in 2-1/2 years. Official employment data for August is due out next week.
Following her address, Hunter participated in a panel discussion with former RBA official Jonathan Kearns and AustralianSuper Economist Felicity Emmett, where she said the economy was moving through a turning point.
“In terms of giving advice to the board and then their decision around policy and the cash rate, turning points are challenging and hard and they’re innately very uncertain,” Hunter said. “Turning points are tough in the setting of policy. So there is uncertainty around that in addition to uncertainty around the outlook.”
The RBA assesses that overall demand in the economy is still exceeding supply, which is keeping inflation stubbornly elevated. Hunter reiterated that view, while adding that some parts of the economy were experiencing pain.
“Households are squeezed for sure,” she said. “We are very, very closely monitoring and thinking about what households might do, in general, in terms of their spending and saving decisions.”
The RBA next meets on Sept. 23-24, with economists predicting it will again stand pat, as it has done since November last year. Money markets reckon it will begin cutting rates late this year, though central bank officials have pushed back against that pricing.
(Adds comments from panel discussion.)
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