Australian Markets Weekly: 24 July 2017

RBA unlikely to begin to normalise interest rates this year unless unemployment begins to fall sharply soon.


The Labour Market and Monetary Policy

  • The pace and extent of the reduction in unemployment and underemployment plus the progress of inflation back to the RBA’s 2-3% target band are key for when the RBA begins to normalise Australian interest rates. This is unlikely to be this year unless unemployment begins to fall sharply soon.
  • RBA Deputy-Governor confirms discussion of neutral rate was of no significance to current monetary policy decision. What is significant is that (i) the RBA’s view of the economy continues to shift more favourably; and (ii) from a longer-term perspective, the current 1.5% cash rate is 200bps below the RBA’s view of neutral..
  • This week’s key events include: (i) Fed meeting (no change in rates expected); (ii) Q2 CPI (core inflation expected to have bottomed at around 0.4/0.5% q/q); and (iii) RBA Governor’s speech on “The Labour Market and Monetary Policy:” which is likely to underline the importance of a reduction in unemployment and underemployment for the normalisation of Australian interest rates. A good guide post may be when the unemployment rates is at 5.25% headed towards 5.0%, however inroads into underemployment are also likely to be important given this measure has been more elevated relative to unemployment in this cycle.

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