Australia’s jobless rate in surprise slide to 7-month low; boosts rate hike bets

By Stella Qiu

SYDNEY, Jan 22 (Reuters) – Australia’s jobless rate dropped to a seven-month low and employment figures blew past forecasts in December, prompting markets to now factor in a more than 50% chance of an interest rate hike next month.

The Australian dollar gained almost 0.6% to reach a 15-month peak of $0.68, while three-year government bond yields hit a more than two-year high of 4.238%.

Investors currently see a 57% chance of a rate hike from the Reserve Bank of Australia on February 3, up from 29% before the data was released. Investment bank UBS said it expected an RBA rate rise in February; it previously expected a hike by the second quarter.

“For the RBA, the labour market still likely needs to ease, to reduce pressure on inflation, to have confidence to achieve its CPI target,” said UBS economists in a note to clients.

“At the moment, it’s going the wrong way.”

A FESTIVE SEASON SURGE

Figures from the Australian Bureau of Statistics on Thursday showed the jobless rate unexpectedly dropped to 4.1%, the lowest level since May last year, from 4.3%. Analysts had looked for a rise to 4.4% and the central bank had also predicted a 4.4% rate by the December quarter.

Net employment jumped by 65,200 in December from November, when it dropped a revised 28,700. That was way above market forecasts of a 30,000 gain, while full-time jobs rebounded by 54,800.

The participation rate ticked up to 66.7%, from 66.6%, while hours worked rose 0.4% to a record of over 2 billion hours. The statistics bureau attributed the labour market strength to more young people, aged 15-24, moving into employment last month during the festive season.

Annual growth in jobs, however, slowed further to 1.1% in December, down from 3.5% at the start of the year.

Coupled with record-high house prices and robust consumer spending, Australia’s recent flow of economic data seems to be suggesting that the monetary policy might not be restrictive at all after three rate cuts last year in the cash rate to 3.6%.

Fourth-quarter inflation figures due next Wednesday look set to make or break the case of a February hike.

“The magic number for trimmed mean inflation is 3.2%. Anything above that will warrant a hike when the RBA board next meets in early February,” said Harry Murphy Cruise, head of economic research for Oxford Economics Australia.

“Anything at or below should be enough for the board to hold rates steady – at least until the next meeting.”

Two of the four biggest Australian banks – the Commonwealth Bank of Australia and the National Australia Bank – have since late last year called for a hike next month, arguing the economy is bumping up against its speed limit.

(Reporting by Stella Qiu; Additional reporting by Wayne Cole; Editing by Edwina Gibbs)