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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 21 July 2015

Unemployment to fall below 6 per cent?

Reserve Bank Minutes

An interesting set of Board Minutes from the Reserve Bank for the month of July 2015.

Previously Reserve Bank forecasts had expected the unemployment rate to inch up to 6.5 per cent through this cycle.

However, since January 2015 the unemployment rate has declined from 6.3 per cent to 6.0 per cent.


And with employment growth (+1.9 per cent) now comfortably outpacing population growth (+1.4 per cent) over the past year, the Reserve Bank notes that the unemployment rate could even be set to fall further still:

"Labour force data indicated further signs of improvement in May. Employment growth had picked up over the year to exceed the rate of population growth. 

As a result, the unemployment rate had been relatively stable since the latter part of 2014 and had fallen slightly in May to 6 per cent. 

Members observed that employment growth had been strongest in household services and that employment and vacancies had been growing for business services but had remained little changed in the goods sector. 

As with other state-based indicators, employment growth and job vacancies had been strongest in New South Wales and Victoria. 

Forward-looking labour market indicators had been somewhat mixed over recent months. 

The ABS measure of firms' job vacancies overall suggested that demand for labour could be sufficient to maintain a stable or even falling unemployment rate in the near term, while other forward-looking indicators suggested only modest growth in employment in coming months."

Despite strong headline employment growth figures, there remains a fair degree of spare capacity in the labour market and inflation expectations remain contained.

Inflation report due tomorrow

On this very note the all-important CPI (inflation) figures for the second quarter of calendar year 2015 will be released tomorrow.

With a sizeable rebound in the price of fuel at the bowser in the June quarter - together with an expected increase in fruit and vegetable prices and medical services - the headline inflation result is forecast to be stronger in Q2, but core inflation is still expected to remain well within the target range.

Market forecasts for the headline quarterly result vary wildly from 0.3 per cent all the way up to 1.0 per cent.

Casting our minds back to the March quarter a huge deflationary contribution came from fuel costs which declined by a massive 12.2 per cent in the quarter and a record 22.5 per cent over the year to March 2015.


We might expect much of that deflationary impact to be reversed tomorrow.

On the preferred core measures, the weighted median (0.64 per cent) and trimmed mean (0.62 percent) prints led to an underlying inflation reading of 0.63 per cent for the March 2015 quarter. 

After amendments to previous quarters the preferred core measures showed underlying inflation tracking at 2.3 per cent and 2.4 per cent respectively, comfortably within the target 2 to 3 per cent range.


The market expects to the core measures to come in at an average of 0.5 per cent for the June quarter and 2.2 per cent for the year, thereby still tracking at the lower end of the target range. 

A result of this nature tomorrow would evidently leave no barrier to a further interest rate cut if one is deemed to be required later in the year.