Markets see a RBA rate cut next month as more likely than not

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  • A rate cut from the RBA in June is now seen as more probable than not, according to futures markets.
  • Australian unemployment has increased over the past two months to 5.2%, the highest level since August last year.
  • The RBA said earlier this month that a “further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.
  • Senior RBA officials have described the unemployment rate as the “most useful summary indicator of the state of the labour market”.
  • A speech from RBA Governor Philip Lowe on May 21 will likely indicate whether or not it will cut rates next month.

A rate cut from the Reserve Bank of Australia in June is now seen as more probable than not following an unexpected lift in Australia’s unemployment rate in April.

Futures markets are pricing a 60% chance that Australia’s cash rate will be reduced by 25 basis points to 1.25% on June 4. Looking further out, a 25 basis point reduction in July, if it doesn’t occur in June, is seen as a near certainty.

A second 25 basis point move, taking the cash rate to 1%, is also fully priced to occur by February next year.

While there were lots of things to like about Australia’s jobs report: solid employment growth, an acceleration in the annual pace of hiring and labour force participation lifting to the highest level on record, the increase in unemployment, along with broader labour market underutilisation, is not a welcome development at a time when underlying inflation is already very weak.

At its May monetary policy meeting, the RBA said a “further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.

Last year, RBA Governor Guy Debelle described the unemployment rate as the “most useful summary indicator of the state of the labour market”.

Should that view extend to the rest of the RBA board, the increase in unemployment over the past two months from 4.9% to 5.2% suggests the labour market is not improving, but softening.

With current market pricing for 25 basis point rate cut in July still evenly balanced, a speech from RBA Governor Philip Lowe on May 21 will likely indicate which way the board will go.

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