Australia Headed For Rate Cut

Australia was headed for its fifth interest rate cut in the space of a year after scary data on Thursday showed employment posted its largest fall for over four years during May.

Employment fell by 40,300 in May, the largest drop since April 1993, the Australian Bureau of Statistics said. Median market forecasts were for a 15,000 rise.

Unemployment rose to 8.8 percent, saved from breaching nine percent only by the number of people who gave up looking for work altogether, analysts said. Its a very disturbing number, ABN-Amro chief economist

Susan Creighton said. It certainly increase the chances of an interest rate cut. Total employment has risen by only 51,900 over the past year, Thursdays data showed.

 

The weakness in employment remained concentrated in full-time jobs. Over the year to May the number of full-time jobs contracted by 17,600. This is just unambiguously scary, Citibank Australia senior economist Annette Beacher said. I think its time to get off the fence and start thinking that they will cut again.

If the Reserve Bank of Australia (RBA) were to cut rates from the current 5.50 percent level, it would be the fifth cut since last July. A weak jobs market has been cited by the RBA as a key factor in each of the four cuts so far.

Analysts said the run of data since the last cut on May 23 had not only supported that decision but suggested the economy was still in need of a further boost, with some already talking of a sixth cut in rates.

The question now is timing, Beacher said. Certainly, the market began to think a cut was on the agenda, and that it could come at any time ahead of the RBAs next board meeting on July 1. The Australian dollar dropped half a cent to a 16-month low of US$0.7510 on the news., while September bank bill futures rallied to be more than 25 basis points under the official cash rate of 5.50 percent.

Employment minister Amanda Vanstone tried to put on a brave face despite the weak figures.

The flat state of the labour market is consistent with the widely-held view that substantial employment growth will not occur until later this year, Vanstone said in a statement.

The jobs fall is a worry for the government, as it comes one day after Westpacs consumer confidence index fell to its lowest level in almost two years, despite the last rate cut on May 23.

Explaining that fall, Westpacs general manager of economics, Bill Evans, said evidence from the survey indicated that unemployment had taken over from interest rates as the most important influence on consumer sentiment.

Some analysts felt that while the jobs data was weak, it should not be overplayed as employment was a lagging indicator that is, the weakness reflected a weak economy at the end of 1996, and there were signs the economy was starting to pick up.

But that view did not hold sway with many.

Yes, it is a lagging indicator, but this sort of job market is indicative of a fairly stagnant economy and one that may be in need of stimulation code for a rate cut, Colonial State Bank group economist Hans Kunnen said.