Early-warning indicators that could see the RBA backflip on interest rates

  • HSBC’s says Australia’s unemployment rate will dictate what happens next with the RBA cash rate.
  • Being a lagging economic indicator, it’s not the best guide to mark a turning point in the jobs market.
  • HSBC says there are several timely indicators that will warn that conditions may be about to get nasty.
  • None are flashing red as yet, underpinning its view that the RBA will begin to lift rates late this year. Financial markets disagree, suggesting there’s more chance of a cut over the same period.

If the Reserve Bank of Australia (RBA) is to cut official interest rates again, a view now favoured by financial markets and an increasing number of economists, it will likely take a substantial weakening in Australia’s jobs market, says HSBC’s Chief Australia Economist Paul Bloxham.

“We believe that some loss of momentum could be tolerated without the RBA delivering a cut,” he said in note released today.

“The RBA would need to believe that the unemployment rate was set to rise materially before it is likely to consider cutting its cash rate.”

As things currently stand, and reflective of the stubbornness from the RBA to ease policy further despite inflation continuing to undershoot its 2-3% target, Bloxham says “the bar for cutting the cash rate is very high”.

“We doubt that continued low inflation would be enough to get the RBA to cut its cash rate further,” he says.

“While the labour market is showing positive momentum and the RBA can forecast that wage growth will lift further and that CPI inflation will head towards the mid-point of the central bank’s 2-3% inflation target, rather than away from it, we expect the central bank to continue to believe that its next move will be up — and to state this in its communications.”


As has been well documented, Australian employment growth has set a rollicking pace over the past couple of years, seeing the unemployment rate drop to the lowest level in six years despite strong growth in Australians joining the workforce.

That also occurred during a period when Australian economic growth improved noticeably, generating demand for workers to deal with increased demand.

As alluded to by Bloxham, that has allowed the RBA to maintain the view that stronger economic growth over the next few years will place downward pressure on unemployment, and upward pressure on wages and inflation, providing the necessary conditions to eventually allow the bank to begin normalising interest rates.

It’s been saying that will occur for some time, and has had to make frequent downgrades to its inflation forecasts, but that view is unlikely to change unless its concerned that inflation won’t return to target.

Hence, unless unemployment starts to lift noticeably, creating downside risks for economic growth and the potential for financial instability, the RBA will likely retain the view that the next move in the cash rate is likely to be higher. Eventually.

But the unemployment rate is a lagging economic indicator. It tells us what demand for labour was in the past, based upon prior economic conditions, rather than what will happen in the future.

If the RBA is monitoring unemployment so closely, could that not lead to a policy mistake, forcing the bank to deliver additional easing well after the proverbial economic horse has bolted?

While Bloxham says the labour market is key to what the future holds, he agrees that it, in isolation, will not provide a timely signal as to if and when the economy needs support.

However, he says there’s a variety of other indicators, aside from leading labour market releases such as job vacancies, that will deliver a reg flag on potential trouble ahead.

“If a sharp downturn were to arrive, perhaps driven by a global shock, it would be likely to show up in other timely indicators before it was in the labour market statistics,” he says.

“The key indicators we are tracking are iron ore and coal prices, which drive much of Australia’s commodity income, and local measures of consumer and business sentiment as well as business conditions and hiring intentions, for signs of a sharp turn in the cycle.”

Despite financial markets pricing in a 50% chance of a 25 basis point rate cut in the RBA cash rate by November, Bloxham notes that none of those early warning indicators are flashing red yet.

Bloxham, like the majority of RBA forecasters as well as the bank itself, still sees the next move in the cash rate as being higher, predicting the start of the next tightening cycle will begin in the final quarter of this year.

The RBA will announce its first monetary policy decision of the year on Tuesday, February 5, the same day that Australia’s December retail sales report — another release that will attract plenty of attention from financial markets.

Before then, data on Australian unemployment and inflation will also be released.

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