Yahoo Finance Why more Aussies in jobs could be bad news for interest rates
If more Aussies are working, why would that be bad for interest rates?
More than 76,000 Aussies found a job in May, bringing the official unemployment rate down to 3.6 per cent. You might think this would be positive news but it could force the Reserve Bank (RBA) to hike interest rates yet again.
IG Markets analyst Tony Sycamore said the “red-hot” jobs number would fuel “rate-hike fever” at the RBA.
“[The May unemployment figures are] confounding those looking for evidence that the RBA’s cumulative 400 basis points of rate hikes to date have taken some of the heat out of a tight Australian labour market,” Sycamore said.
“The extraordinarily strong jobs number will provide little comfort to the RBA, given its concerns about a tight labour market, rising wages and poor productivity feeding through into inflation”
Also read: RBA rate hikes slash borrower budgets by $250,000
Also read: RBA deals ‘shock’ $15,000 blow to Aussies as interest rates rise again
Also read: Mortgage stress at highest level since 2008: 1.4 million Aussies ‘at risk’
Why is the RBA concerned about a ‘tight’ labour market?
Inflation needs to come down, but a whole bunch of Aussies getting jobs and having cash means they will likely spend that money.
The RBA is actively trying to get people to stop spending money, by making other things more expensive - like mortgage repayments and credit cards - by hiking interest rates.
The hope for the RBA is that businesses pull back on hiring and wages don’t go up (in line with inflation - they do want wages to rise, just not as high as inflation, otherwise the problem just keeps feeding itself). Inflation should then fall because businesses will need to lower prices to encourage people to buy stuff again.
If it sounds complicated, well it kind of is.
Big business really the catalyst for cost of living coming down
The RBA has one tool to bring down inflation and that’s interest rates. It is a blunt tool, but it’s all it has.
Now, while inflation is high and businesses have had to pay more for transport costs (because of higher oil prices) and longer wait times for goods (because of lockdowns in China), they have still been bringing in major profits.
Coles and Woolworths have been cashing in thanks to higher inflation. In the 2022 financial year, Coles reported an annual profit after tax of more than $1 billion. Woolies reported a $907 million profit.
Someone, somewhere along the line needs to take the brunt of inflation. It’s clear from these big business mega-profits that they’re not the ones willing to do it. So, the consumer is taking the hit.
It’s the same with the Big Four banks. While Aussies are struggling to keep up with rising mortgage repayments, CBA brought in $5.27 billion in net profit in just the first half of 2023, ANZ made $3.8 billion, NAB reported $3.48 billion and Westpac reported a $4 billion profit.
The Australia Institute found corporate profit was the main reason Aussies were dealing with soaring prices.
“The main driver for inflation in Australia is excess corporate profits, not wages. Inflation would have stayed within the RBA target band if corporates had not squeezed consumers through the pandemic via excess price hikes,” it said.
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