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Interest rates could rise 3% on back of jobs figures

Female manager and colleague at desk job in a modern office with view of Syndey Harbour Bridge in background.
The jobless rate for women fell from 3.8 per cent to 3.7 per cent in March. (Source: Getty) (Johnny Greig via Getty Images)

The latest jobs figures are welcome news and fit with other evidence of an overheating economy and ongoing super-strong demand for labour.

In March, employment rose by 18,000, which is a solid result, while the unemployment rate remained steady at 4.0 per cent. This is a fraction away from the lowest unemployment rate seen in Australia since 1974.

Also by the Kouk:

At one level, because the labour force data for March were not spectacular in the way many of the releases in the past 12 or so months have been as the economy has climbed out of lockdowns and disruptions from COVID, the unemployment rate is nonetheless at a level no one was imagining a year or more ago.

The broad view, even prior to the onset of the pandemic, was that ‘full employment’ in Australia was consistent with an unemployment rate a little above 5 per cent.

Indeed, this is one critical reason why the Reserve Bank (RBA) made a mistake and failed to cut interest rates earlier because it feared easier monetary policy would stoke a surge in wages growth and, with that, runaway inflationary pressures.

The more common view now is that the economy can grow and sustain an unemployment rate around 3.5-3.75 per cent. This theory will be fully tested over the next six to 12 months as the economic expansion is pump-primed by expansionary fiscal and monetary policies.

Australia is not alone in achieving low unemployment. Indeed, our achievement is fairly modest when compared with many similar countries.

Australia’s unemployment rate is broadly in the middle-to-upper-half of the pack. Indeed, many countries already have unemployment rates below 3.5 per cent.

  • Japan 2.7%

  • South Korea 2.7%

  • Germany 3.0%

  • Poland 3.0%

  • New Zealand 3.2%

  • US 3.6%

  • UK 3.8%

  • Australia 4.0%

  • Canada 5.3%

  • France 7.4%

  • Sweden 7.9%

The big questions for the economy are:

  • How much lower can the unemployment rate sustainably fall?

  • When will the hard data show a material lift in wages growth?

  • How will this flow into already-red-hot inflation?

Interest rates will climb

Whatever the answers to these questions, there is now little doubt a series of interest rate hikes are beckoning.

If it were not for the timing of the election, the RBA would have lifted interest rates already, much like its counterparts in the US, UK, Canada and New Zealand, to name a few.

There is still a real risk the RBA will bite the bullet and lift interest on May 3 - less than three weeks before election day.

Reserve Bank of Australia governor Philip Lowe gestures while speaking.
There is still time for RBA governor Philip Lowe to raise rates before the May election. (Source: Reuters) (Jason Reed / reuters)

If the March-quarter inflation data, which will be released on April 27, show headline inflation near 5 per cent and underlying inflation well above the top end of the RBAs 2-3 per cent target band, a rate hike would be appropriate, albeit overdue.

Over the next few months, such is the demand for labour - as evidenced in the various job advertisements and vacancies series - that the unemployment rate will break towards 3.75 per cent and probably lower.

This good news may be tempered if, as is also likely, it sparks additional inflationary pressure from an already-elevated starting point and, as a result, the RBA hikes interest rates even more than the futures market is currently pricing in.

Get set for interest rate increases of up to 3 percentage points over the next 18 months. The economy is strong enough to absorb such a move and such policy action is probably needed to bring inflation back onto the target range.

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