Rates likely on hold for the entire year – Capspace

But there is risk of a rate increase as jobless rate drops

Rates likely on hold for the entire year – Capspace

Interest rates are expected to remain unchanged for the rest of the year, with a slight possibility of a rate increase if inflation stays above the central bank’s 2% to 3% target range, according to non-bank lender Capspace.

Tim Keith (pictured), managing director of Capspace, said this outlook was influenced by a tight labour market, which continues to drive up wages and services inflation.

The Australian Bureau of Statistics (ABS) has reported that the seasonally adjusted unemployment rate dropped by 0.1 percentage point to 4% in May. Employment rose by nearly 40,000 people, and the number of unemployed fell by 9,000, leading to the lower unemployment rate.

“The tight labour market will keep up with pressure on wages costs and services inflation, which, along with the rising cost of rent and housing, will keep inflation elevated, which is likely to see the Reserve Bank of Australia (RBA) keep rates on hold at its June meeting and for the remainder of this year,” Keith said.

“Annual wages growth in Australia remains well above average as a result of ongoing strong demand for labour despite some slowing in economic growth. Recent data from the ABS reveals that annual wages growth has remained at or above 4% since September quarter 2023; the last time wages growth was at this level for three consecutive quarters was March quarter 2009 and the RBA will be very cognisant of this pressure on wages.” 

The RBA board will hold its two-day meeting starting Monday and is expected to keep the cash rate steady at 4.35% when it announces its decision on Tuesday. Bloomberg data indicates that money markets are now pricing a 30% chance of a rate cut this year, down from 36% before the release of the latest ABS unemployment data on Thursday.

According to the ABS, there are now nearly 600,000 unemployed people in Australia, about 110,000 fewer than in March 2020, just before the pandemic. The employment-to-population ratio and participation rate remain significantly higher than their pre-pandemic levels. High job vacancies suggest the labour market remains relatively tight, though less so than in late 2022 and early 2023.

“In such an environment, I believe the central bank will be very reluctant to cut interest rates given strong upward pressures remain on overall living costs, especially in the housing market,” Keith said. “The ongoing issue there is an excess of demand over supply, which supports house prices in the immediate future, which, along with the tight labour market, will keep pressure on inflation.”

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