- The RBA expects stronger labour market conditions to help to slowly boost wage growth, inflation and economic activity in the period ahead.
- Financial markets and most economists believe the RBA is wrong, but Australians are backing the RBA’s view.
- According to those surveyed in the latest Westpac-MI Consumer Sentiment report, fewer expect unemployment will rise in the year ahead.
- Financial markets remain fully priced for the RBA to cut Australia’s cash rate to 1% by early next year. Westpac sees it falling to that level by November this year.
The Reserve Bank of Australia (RBA) expects stronger labour market conditions to help to slowly boost wage growth, inflation and economic activity in the period ahead.
While financial markets and most economists believe the RBA is wrong, predicting it will cut official interest rates over the next 12 months, potentially as soon as June, the bank has found an ally in a somewhat unlikely source: Australians, or at least those surveyed in the latest Westpac-MI Consumer Sentiment report for May.
Fewer of us believe unemployment will increase over the next 12 months.
“Job loss fears eased again in May,” said Bill Evans, Westpac’s chief economist, in a note following the release of the report.
“The Westpac-Melbourne Institute Unemployment Expectations Index recorded a 5.1% decline. At 120.9 the index is back near recent lows and still comfortably below the long run average of 130.”
A lower figure in the index indicates that fewer Australians believe unemployment will increase in the year ahead.
While Australians are less concerned about job market conditions than they were a month ago, Westpac is suggesting the recent divergence between strong labour market and other economic indicators that have been weak will be resolved by an increase in unemployment to 5.4% in the second half of the year.
“The [RBA] is still somewhat puzzled by the tension between strong labour market prints and the weak GDP and partial data,” Evans said.
“We expect that will be resolved over the next few months with the case for the August cut becoming clear.
“Markets and many commentators are more impatient, expecting a move as early as the June meeting. We think it will take more than one or two months’ data for the issue to be resolved by the Bank.”
Aside from the outlook for unemployment, the headline Westpac-MI Consumer Sentiment Index rose 0.6% to 101.3 in May, indicating that a slim majority of Australians are feeling optimistic.
Evans said that may partially reflect a growing expectation that the RBA will cut official interest rates.
“Despite the Reserve Bank ultimately deciding not to cut the cash rate at its May Board meeting it is likely that households are much more confident this month than previously that interest rates are likely to come down further,” he said.
“Media coverage both pre and post the Reserve Bank decision is pointing strongly to eventual interest rate relief.”
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