Why the lowest unemployment rate since 1974 makes a May interest rate hike more likely

The lowest unemployment rate in 48 years and soaring inflation could lead the Reserve Bank to raise interest rates next month amid an election campaign.

Australia’s unemployment rate in March fell to just 3.95% – the lowest rate since September 1974.

An additional 17,900 jobs were created as full-time jobs rose by 20,600 and part-time jobs fell by 2,700, new official data showed on Thursday.

Female unemployment fell to 3.7%, the lowest since May 1974, while the male unemployment rate of 4.2% was the second lowest since November 2008.

While the good news could help Prime Minister Scott Morrison win a fourth consecutive term for the Coalition, it also makes an interest rate hike more likely in May as voters grapple with cost of living pressures.

The Reserve Bank of Australia does not usually raise the exchange rate in the middle of an election campaign, but it did in November 2007 – which contributed to Liberal Prime Minister John Howard’s defeat by Labor Kevin Rudd after nearly 12 years in power.

The lowest unemployment rate since 1974 and soaring inflation could lead the Reserve Bank to raise interest rates next month amid the election campaign. Australia’s unemployment rate in March fell to just 3.95% – the lowest rate since September 1974 (pictured is a Sydney barista)

Unemployment in Australia

NEW SOUTH WALES: 3.9%

VICTORIA: 4 percent

QUEENSLAND: 4 percent

SOUTH AUSTRALIA: 4.9%

WESTERN AUSTRALIA: 3.4%

TASMANIA: 4.5%

NORTH TERRITORY: 4.1%

AUSTRALIAN CAPITAL CITY TERRITORY: 3.4%

Economist Saul Eslake, founder of Corinna Economic Advisory, said the RBA would be likely to raise interest rates in early May – which would be the first increase in 12 years – if official price index data consumer prices for the March quarter were to be released in April. 27, showed more evidence of runaway inflation.

He expects headline inflation of 4%, the highest since 2008, which would also be well above the Reserve Bank’s 2-3% target.

Last year’s CPI rose 3.5%.

“What might prompt them to raise rates in May is the March quarter CPI,” Mr Eslake told Daily Mail Australia.

“It would be difficult, I think, for the Reserve Bank not to raise rates if that’s the evidence they have.”

Mr Eslake said delaying a rate hike until June, to avoid acting just two weeks before the May 21 election, could mean a 0.4 percentage point rise in the current cash rate of 0, 1% instead of an increase of 0.15 percentage points in May.

“Either they raise rates in May in response to the March quarter CPI or if they don’t, they can be blamed by some people – I’m not going to be one of them – d ‘be shy about the election,’ he said. mentioned.

A smaller increase of 0.15 percentage points in May, bringing the cash rate to 0.25%, would add $47 per month to a typical $600,000 loan, with repayments reaching $2,353, under a floating rate up 2.44%.

But a larger 0.4 percentage point increase in June, taking the cash rate to 0.5%, would see repayments on an existing variable loan rise 2.29% from $125 to $2,431 as mortgage rates were climbing to 2.69% – assuming they only rose in line with the RBA cash rate.

While the good jobs news could help Prime Minister Scott Morrison (pictured campaigning in Tasmania) win a fourth consecutive term for the Coalition, it also makes an <a class=interest rate hike more likely in May as the voters struggle with cost of living pressures.” class=”blkBorder img-share” style=”max-width:100%” />

While the good jobs news could help Prime Minister Scott Morrison (pictured campaigning in Tasmania) win a fourth consecutive term for the Coalition, it also makes an interest rate hike more likely in May as the voters struggle with cost of living pressures.

New Zealand and Canada raised their official rates this week by half a percentage point, to 1.5% and 1% respectively, while economists widely expect the US Federal Reserve to raise its rates. rates in May and June.

Inflation is clearly a global phenomenon, as Covid supply constraints and rising crude oil prices are making goods more expensive.

Mr Eslake said the Reserve Bank in May 2022 could do what former Governor Glenn Stevens did in November 2007 and act within weeks of an election.

“Given that inflation was well above the Reserve Bank’s target at the time, he had every reason to do so,” he said.

Falling unemployment also means that employers will finally have to start giving their staff decent pay rises, which would end a decade of stagnant wage growth.

KPMG senior economist Sarah Hunter said the historically low unemployment rate would make the RBA more concerned about inflation.

“This suggests that employers looking to recruit staff will need to be more competitive to attract workers – and will have to resort to wage increases – confirming the RBA’s view that pressures are currently building across most economy,” she said.

Canstar’s managing director of research, Mitch Watson, said borrowers should prepare for a series of interest rate hikes in 2022.

Economist Saul Eslake, founder of Corinna Economic Advisory, said the RBA would likely raise interest rates in early May if official consumer price index data for the March quarter, which was due to be released on April 27 showed more evidence of a spike in inflation (pictured is a customer in Sydney)

Economist Saul Eslake, founder of Corinna Economic Advisory, said the RBA would likely raise interest rates in early May if official consumer price index data for the March quarter, which was due to be released on April 27 showed more evidence of a spike in inflation (pictured is a customer in Sydney)

The big banks all expect higher interest rates

COMMONWEALTH: Reserve Bank rate hikes to start in June. The cash rate will reach 1.25% by February 2023

WESTPAC: Increases from June. The cash rate will reach 2% by June 2023

NAB: First move in June. The spot rate will reach 2.25% by August 2024

ANZ: Beginning of the hikes in June. The cash rate will reach 2% by November 2023 and peak above 3%, but not before 2023

Source: RateCity

“Mortgage holders should prepare their home loan for upcoming interest rate hikes by making additional repayments and putting extra money into their offset account,” he said.

“This will lessen the shock of a rate hike and an increase in monthly repayments.”

The RBA kept the cash rate in April at a record low of 0.1%, but Governor Philip Lowe said he expected rising petrol prices to cause a “further rise in inflation over the coming quarters.

CommSec senior economist Ryan Felsman said the central bank was likely to declare a tightening bias at its May meeting, signaling its intention to continue raising rates while waiting until June to act.

“We believe the RBA is underestimating the strength of price pressures across the economy,” he said.

Ahead of Thursday’s release of Australian Bureau of Statistics labor force figures, the big four banks expected the RBA to raise the key rate in June, which would mark the first increase since November 2010.

Shortly before the news broke on Thursday, ANZ and Westpac raised their fixed mortgage rates again, a day after Commonwealth Bank did.

ANZ raised its fixed rates by 0.6 percentage points for homeowners and investors, bringing increases since the start of 2022 to 1.4 percentage points for three-year fixed rates, according to analysis by Canstar.

Commonwealth Bank, Australia’s biggest property lender, has raised its three-year fixed rates by 2.05 percentage points since the start of this year.

NAB raised its three-year fixed rate by 1.9 percentage points in 2022 while Westpac raised its lending levels by 2.2 percentage points – Thursday’s increase being the sixth this year.

Fixed mortgage rates from major banks are now above 3%, while variable rates are even closer to 2% until the RBA raises the cash rate.


Source link