RBA Grapples With Uncertain Job Market, Accelerating Housing

  • Global inflation risks are ‘more balanced’ than for some time
  • Assessing housing market conditions is ‘more complicated’

A man enters the Reserve Bank of Australia headquarters in Sydney, Australia.

Photographer: Bloomberg

Australia’s central bank is struggling to gauge the strength of the labor market and its implications for inflation while house prices on the east coast accelerate.

At the same time, the Reserve Bank of Australia said in minutes of its Nov. 1 meeting in Sydney Tuesday that the risks to the global inflation outlook “were more balanced than they had been for some time.” That follows a rebound in commodity prices and faster forecast growth in major advanced economies.

“Considerable uncertainty remained about the strength of labor market conditions and the implications for labor cost growth,” the RBA said after leaving the cash rate at a record-low 1.5 percent. It added “the overall assessment was that the risks around the inflation forecast were broadly balanced.”

Australia is struggling with weak inflation that policy makers only expect to reach the bottom of their 2-3 percent target at the end of 2018. While unemployment has fallen, most of the jobs growth has come from part-time work and the jobless rate of 5.6 percent is flattered by falling participation.

The Australian dollar was little changed, buying 75.73 U.S. cents at 11:35 a.m. in Sydney, compared with 75.77 cents before the report’s release.

Spare Capacity

“Members observed that there was uncertainty about the degree of spare capacity in the labor market and how this might ultimately affect inflationary pressures,” the RBA said. Concern about inflation prompted the central bank to cut rates twice this year, sparking renewed strength in some property markets, even as prices in the mining capital of Perth receded.

“Assessing conditions in the housing market had become more complicated,” the RBA said. “Housing price growth had picked up noticeably in Sydney and Melbourne.”

Australia is also enjoying a windfall as key commodity prices surge, lifting the nation’s terms of trade and boosting national income. Growth in iron ore and coal prices reflects stimulus in China that has spurred construction and authorities in Beijing ordering coal producers to cut excess capacity.

The rebound in the terms of trade, or export prices relative to import prices, hasn’t been matched in full by the currency, although it is up 10 percent in the past 10 months. The central bank reiterated that an appreciating Aussie could complicate the economy’s adjustment from mining investment.

In terms of the economy at present, the RBA said it “appeared to have continued growing at a moderate pace” in the third quarter. It said there was “significant uncertainty” about the outlook for consumption growth as households’ expectations of income gains were unknown and that is a key factor in spending and savings decisions. “This was particularly pronounced for households with significant debt,” the central bank said.

Still, “the transition of activity from the mining sector to the non-mining sector of the economy had continued,” it said.

Traders have become more confident in Australia’s prospects, winding back bets on a rate cut next year and pricing in a greater than 50 percent chance of a hike late in 2017.

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