Friday, August 8, 2014

RBA warns - jobless rate could remain high until 2016

The Reserve Bank has signaled that Australia's jobless rate could remain high for the next two years.

In its quarterly update on the Australian economy, the central bank cautions that unemployment will be "elevated for some time yet" before gradually declining in 2016.

The RBA's statement released this morning was published taking into account yesterday's surprise increase in the official jobless rate to 6.4 per cent.

While the Reserve Bank was most likely surprised by the jobless spike for July, today's document reconfirms its broad expectations for a sluggish jobs market.

The comments also paint the picture of recent mixed signals in Australia's economy with headline inflation in the last quarter back at the top of the RBA target zone and the solid improvement in data such as retail sales.

"Some labour market indicators have improved a little since the beginning of the year, but overall conditions remain subdued," the statement says.

"Forward looking indicators of labour demand have generally improved since late last year, pointing to modest employment growth over the coming months.

"However, there remains a degree of spare capacity in the labour market."

The RBA also underscored to moving nature of the monthly employment report amid speculation that a changed measure of employment might be a factor behind the 6.4 per cent jobs rate.

"The measured unemployment rate has been quite volatile from month to month over the year to date," the statement cautions.

"This may in part reflect a notable change to the definition of unemployment in the month of July."

In recognition of the subdued outlook, the Reserve Bank has cut its economic growth forecasts slightly from 2.75 per cent in December 2014 down to 2.5 percent.

Growth is expected to recover by December 2016 when the pace could make a comeback as high as 4.25 percent.

In the same period, headline inflation has been downgraded from 2.75 per cent to 2 percent.

The slower outlook growth and inflation, combined with a subdued on jobs market could see the cash rate remain on hold for a longer period than many economists have anticipated.

However, today's statement is likely to reignite speculation that the Reserve Bank might cut interest rates again later in the year.

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