RBA holds firm against cutting interest rates, with Australia’s jobless rate set to rise

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The Reserve Bank’s new line in the sand gets its first big test with the latest reading from the jobs market this week.

Key points:

  • Unemployment and wages data this week will be crucial in framing the RBA and market’s views about future interest rate cuts
  • Economists see little chance of unemployment falling in line with the RBA’s hopes
  • Despite increased trade tensions, markets rebounded solidly late last week with the ASX priced to start the week in positive territory

The new line, as set down in the RBA’s latest Statement on Monetary Policy (SOMP), can be roughly defined as the unemployment rate holding at 5 per cent through 2019 and 2020 before drifting lower.

The persistent head-winds of low inflation has seemingly blurred, if not blown away, the RBA’s previous markers — parallel lines which were intended to corral inflation between 2 to 3 per cent for as far as the eye can see, or an economist can forecast.

Governor Philip Lowe made it clear a further improvement in the labour market was needed to get the economy out its rut and back in the groove, growing at its full potential.

No back-tracking on this one for the RBA. Lower unemployment and underemployment — where workers are searching for more hours to make ends meet — will soak up the spare capacity sloshing around the economy, inflation gets back to where the RBA wants it and GDP grows at its long term trend, or better.

That’s still a long way off, even using the RBA’s recently updated and far from pessimistic forecasts.

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