Australia’s central bank is carefully monitoring the state of the labor market, with Governor Michele Bullock noting that ongoing tightness could signal a stronger economy. This, in turn, may complicate the disinflation process. Speaking before a parliamentary panel in Canberra, Bullock emphasized that while strong employment growth is beneficial for job seekers, it could also indicate increased economic strength, potentially delaying or derailing the disinflation process.
Hawkish Tone and Caution on Interest Rates
Governor Bullock’s comments follow a week of hawkish communication from the Reserve Bank of Australia (RBA). Earlier this week, the RBA cut its cash rate for the first time in over four years, lowering it to 4.1%. Despite this rate cut, Bullock expressed caution, noting that the board was not “pre-committed” to any future rate moves. The central bank remains data-driven and is evaluating evolving economic risks.
“The board is committed to being guided by the incoming data and our evolving assessment of the risks,” Bullock said. “We are alert to the possibility that the strong employment growth could signal more strength in the economy, which could delay or derail the disinflation process.”
Economic Indicators: Strong Job Growth, Moderate Wage Pressure
Recent data has painted a mixed picture of the Australian economy. January jobs data showed strong hiring—more than double what was expected. However, the jobless rate ticked up slightly to 4.1%. In contrast, fourth-quarter wage data revealed a slowdown in wage growth, suggesting that while the labor market remains tight, it is not yet contributing significantly to wage-price inflation.
Despite this, Governor Bullock warned that easing monetary policy too quickly or too aggressively could hinder the disinflation process, leaving inflation above the RBA’s target range. She explained, “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.”
Key Uncertainty: Labor Market Spare Capacity
Bullock highlighted the uncertainty surrounding the extent of spare capacity in the labor market. The amount of available capacity will have a major impact on future inflation, she said, stressing the need to carefully monitor economic conditions before making further rate decisions.
The RBA’s latest forecast predicts trimmed mean inflation to ease to 2.7% by mid-2025, where it is expected to remain through mid-2027. This forecast assumes three rate cuts in the coming year, including the one already implemented. However, core inflation remained at 3.2% in the last quarter of 2024, above the RBA’s 2-3% target range.
Market Expectations: Rate Cuts and Hawkish Outlook
Following recent comments from RBA officials, money markets have revised their expectations. The likelihood of a third rate cut has dropped to under 70%, with traders now fully pricing in just one more rate cut this year.
Governor Bullock acknowledged the progress made over the past three years but emphasized that the RBA’s work is far from over. “The board needs to be confident that it is returning to the target range sustainably,” she concluded, highlighting the importance of cautious and measured decisions moving forward.
Conclusion
Governor Bullock’s remarks suggest that while the RBA is committed to ensuring economic stability, the central bank must navigate carefully amid a tight labor market and inflationary pressures. The decision to ease monetary policy will be closely tied to future data, with the disinflation process and inflation target remaining the key factors in determining interest rate movements in the coming months.
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