Tim Keith

Interest rates are likely to remain unchanged for the remainder of the year, with a low risk of one more rate rise if inflation stays above the central bank’s 2% to 3% band, with the tight labour market keeping upward pressure on wages costs and services inflation, according to Tim Keith, Managing Director of Capspace.

The seasonally adjusted unemployment rate fell by 0.1 percentage point to 4.0% in May, according to data released today by the Australian Bureau of Statistics (ABS).  With employment rising more than expected, by almost 40,000 people, and the number of unemployed falling by 9,000 people, the unemployment rate fell to 4.0%, the ABS said.

“The tight labour market will keep up with pressure on wages costs and services inflation, which, along with the rising cost of rent and housing, will keep inflation elevated, which is likely to see the RBA keep rates on hold at its June meeting and for the remainder of this year,” said Mr Keith.

“Annual wages growth in Australia remains well above average as a result of ongoing strong demand for labour despite some slowing in economic growth. Recent data^[1] from the ABS reveals that annual wages growth has remained at or above 4% since September quarter 2023; the last time wages growth was at this level for three consecutive quarters was March quarter 2009^[2] and the Reserve Bank of Australia (RBA) will be very cognisant of this pressure on wages.

“We believe that with the employment market remaining tight, and with no immediate signs of inflation falling below 3%, the RBA is likely to keep interest rates on hold at its June meeting next week and in the months to come,” Mr Keith said.

The Reserve Bank board will hold its two-day meeting from Monday and is expected to hold the cash rate steady at 4.35 per cent when it announced its decision on Tuesday. According to data from Bloomberg, money markets are now pricing a 30% chance of a rate cut this year, down from 36% before today’s data release.^[3]

According to the ABS, there are now almost 600,000 unemployed people in Australia, nearly 110,000 less than in March 2020, just before the pandemic. The employment-to-population ratio and participation rate both continue to be much higher than their pre-pandemic levels. Together with elevated levels of job vacancies, this suggests the labour market remains relatively tight, though less than in late 2022 and early 2023, the ABS said today.

“In such an environment, I believe the central bank will be very reluctant to cut interest rates given strong upward pressures remains on overall living costs, especially in the housing market. The ongoing issue there is an excess of demand over supply, which supports house prices in the immediate future, which, along with the tight labour market, will keep pressure on inflation.”

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