As the labor market continues to be a concern for members of the Reserve Bank of Australia board, the recent back-to–back rate cuts may be just the beginning of further monetary policy ease.
The official minutes of the July monetary policy board meeting have put an emphasis on the state of employment across the country — while the employment growth remained steady at 2.9% over the year to May, the joblessness rate continued to hold up.
According to the minutes, “The unemployment rate remained stable at 5.2% in June while the underemployment rate was high.”
Forward-looking indicators like job advertisements and business plans suggest that there may be a slowing in future growth of employment.
According to the minutes, “Members believed that a further reduction in interest rates would support growth in employment and incomes as well as strengthen overall economic conditions, which would in turn support a gradual rise of underlying inflation.”
According to the central bank, the rate of employment growth continues outpace that of the working-age population. The strongest increase in labor demand was caused by the rise in participation, not the decrease of unemployment.
How does income growth impact you?
The board members also noted that although household disposable income had increased in recent quarters due to strong labour income, it had remained relatively low for the entire year.
According to the minutes, even with strong employment growth and high household disposable income growth, it was still low. This led to low growth in consumption.
They believe, however, that Australian households will see an increase in incomes due to the recent tax offsets.
Although the minutes indicated that consumption would be supported if there was a higher growth rate for disposable income, the outlook for consumption was not clear.
House prices hamper consumption
According to RBA, the housing slump is believed to have led to a decrease in consumption. It rose 1.8% between the March quarter and the previous year. This was well below the average and was therefore considered flat.
“The increase in household spending for essentials was fairly steady, but discretionary spending declined in the March quarter.” These minutes showed that the weakness was widespread across the country.
They noted that signs of growth are starting to appear in Australia’s residential market, especially in Sydney & Melbourne.
Further rate reductions would boost employment
All things being equal, the minutes indicated that a further drop in interest rates would encourage growth of employment and incomes as well as stronger economic conditions overall.
The board stated that Australia would benefit from lower interest rates to make it more productive and help ensure progress towards its inflation target. “The board will continue to monitor developments in the labor markets and adjust monetary policies as necessary to support sustainable economic growth and reach the inflation target.