Unemployment rise forces Reserve Bank of Australia's first cash rate movement in more than two years

Quick summary

The official cash rate dropped to 1.25 as:

·         Consumer price inflation hovers around 1.2%;

·         The Australian dollar fell to 69.12c;

·         Unemployment increased to 5.2%;

·         Housing price declines stabilise; and

·         Home lending continues to cool.

Unemployment Rise Forces Rate Drop

The Coalition winning the Australian federal election not only came as a surprise, but it also meant that Australian’s dodged unwanted negative gearing changes. A move that many financial and property experts have said would have a profound impact on housing investment.

Given this unexpected result, consumer confidence has improved. But despite this unemployment rates rose, forcing the Reserve Bank to drop the official cash rate.

Economists say that this may be the first of many cuts to come. If unemployment and inflation continue to stall, then a further rate cut, possibly two may occur over the next 6-months. Of course, this will depend on several economic indicators.

Consumer Confidence

Before the federal election, consumer confidence based on the ANZ-Roy Morgan Australian Consumer Confidence index fell marginally by 0.3%, with future financial condition sentiment dropping by 1.2%.

However, after the results of the federal election, consumer confidence rose. May 21 results showed a 0.5% improvement in current financial condition sentiment, and future financial conditions recovered by 1.2%. Current economic conditions lifted by 3.8% and future economic conditions picked-up by 0.9%.

May 28 results have shown that consumer confidence is continuing to rise since the election. Future financial conditions rose by 0.8% and with current financial climbing by 1.2%. Future economic conditions also increased by 4.5% and current economic rose 3.0%.

Another positive impact on consumer confidence is the shift in the housing market, where home prices are beginning to stabilise after falling significantly.

Australian Property Prices

Data released by CoreLogic on May 30, 2019, indicates that while the Australian property market is still in a period of adjustment, the rate of decline is easing. The Daily Home Value Index suggests that the year-on-year change over five capitals – Sydney, Melbourne, Brisbane, Adelaide and Perth – has declined by just 0.03% since April 30 2019.

Dwelling Values Year-On-Year
All Dwellings
City or Suburb	30.04.2019 %	30.05.2019 %	Change %
Sydney	-10.95	-10.79	+0.16
Melbourne	-10.02	-10.02	No change
Brisbane	-2.12	-2.47	-0.35
Adelaide	+0.30	+0.20	-0.10
Perth	-8.31	-8.88	-0.57
5 Capitals Combined	-8.81	-8.84	-0.03

Source: CoreLogic RPData

Tim Lawless head of research at CoreLogic suggests that the Australian housing market has progressed through ‘the worst of the downturn.’ The rate of decline, according to Tim Lawless, is slowing so instead of seeing home values decline by 2% monthly, we’re now seeing marginal drops in value of around 0.5% or less.

Economists also agree that the market downturn is easing. April saw the housing market nationally decline by 0.5%. This result was 0.2% less than March, which recorded a decline of 0.7%, and 0.4% less than February, which recorded a decrease of 0.9%.

Property analysts also suggest that Sydney property prices will reach rock bottom in spring and begin to rebound by the end of 2019. Many investors say analysts, have been waiting to see what changes would occur to negative gearing. Now that the Coalition is running the country, it’s likely that investors may return to the market.

However, despite this positive news, unemployment is of concern to the Reserve Bank, especially when inflation is below target.

Unemployment Rates

While the Reserve Bank hinted at previous meetings that a rise in unemployment could result in an official rate cut, the Bank also suggested that this rise in unemployment would need to be significant. At this point, the Australian unemployment rate has shifted from a low of 4.9% at the start of 2019 to 5.2%.

Also, looking at the unemployment rate state-by-state, levels range from a low of 4.5% in New South Wales to 6.8% in Tasmania. Looking at joblessness by geographical area, the variance is even higher with rates as low as 1.9% in Southern Sydney and as high as 14.0% in outback Queensland.

While lowering the cash rate can aid to stimulate the economy, CommSec economists suggest that this move by the Reserve can only do so much. Cutting rates will only have a modest effect, at best, to encourage economic growth. To promote further growth, economists indicate that both state and federal governments need to look at boosting infrastructure in specific areas and also consider how they can change population policy to boost employment and give the country more significant economic momentum.

While the Reserve governor Philip Lowe has indicated that a lower cash rate could stimulate employment and improve inflation targets, he has also pointed out that the Reserve needs to display stability.

Where’s the Cash Rate Heading?

Economists nationwide are now suggesting that it is only a matter of time before the Reserve Bank cut rates again. Some economists suggest another 0.25% cut by the end of 2019, while others are indicating that two cuts may be on the cards.

If two rate cuts occur, then they’ll be in quick succession, within 12-months, say economists. Predictions are for another cut in either July or August and November.

This move by the Reserve is bold, but it is also expected to stimulate consumer spending by increasing household capital and further improving consumer sentiment. Plus, the move may give inflation the boost that is needed.

Economists are also predicting that a drop in the cash rate will help first home to break into the real estate market.

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