Jobless fears the key to coming rate cuts

by Adam Smith19 Mar 2012

Concerns about unemployment could be "the key" to prompt another RBA rate cut in May.

Westpac chief economist Bill Evans has said that the Reserve is unlikely to take the axe to rates in April despite a worsening outlook for labour conditions. Evans pointed to the latest Westpac - Melbourne Institute Index of Consumer Sentiment, which fell 5% in March amid unemployment fears.

"The Index is now up 41% over the last year, indicating that respondents are significantly more concerned about job prospects. It is at its highest level since July 2009 and only around 10% below
the average level over that prior 9-month period, when households registered record degrees of anxiety about jobs in the aftermath of the global financial crisis," Evans said.

Evans said the RBA response during the last period of unemployment anxiety was "swift and aggressive". He also pointed out that unemployment expectations have previously been a reliable indicator of the future unemployment rate.

"It is consistent with our forecast that the unemployment rate is likely to rise in excess of 5.5%, reaching 5.7% by the second half of 2012," he said.

Evans argued that the labour market held "the key to future policy" for the Reserve Bank. He predicted that the RBA would move further on rates in 2012, but not until seeing "a further deterioration in the unemployment rate".

"For that reason, we are not anticipating a rate cut in April, but retain our expectation that the next move will be in May [or] June."

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