New jobs are the key to where interest rates are headed
Where interest rates head in Australia next year and beyond depends not on inflation per se but on what happens with new job creation.
This impacts the unemployment rate and, in most situations, the level and direction of inflation.
So looking forward it is all about jobs.
Our first chart shows that the annual rate of job creation is currently above the long-term average.
Good if you are looking for work but not so much if you have a big mortgage or outstanding loan.
Yet the ‘good’ has a big caveat too, in that many of the new jobs created over the past couple of years have been in the public sector or in government-aligned work.
Nevertheless, the RBA and many economists see these as “real” jobs.
Well, I do remain sceptical.
But maybe that is just me.
The second chart shows that there is a strong relationship between the job growth trend and when the RBA lifts and cuts official interest rates.
If we see job growth start to trend downwards – and especially below the long-term trend – then interest rates here will start to fall.
Chart 3 shows that the financial markets expect rates to fall, but they aren’t as keen as they were a few months back.
For that blame the little recent tick upward in the annual job growth trend as shown in chart 1.
Looking forward
The next RBA meeting is on the 18th of February where they might drop the cash rate by 0.25%.
Might.
This meeting will be after the December Quarter ABS CPI results out in late January.
I expected the cash rate to fall last month.
Many of you will recall that I said that.
I anticipated that new job growth would have slowed more, as the new labour laws kicked in.
Maybe I just got ahead of myself.
But maybe not given that two-thirds of the recent new work has been government-related, and the current federal government has no shame when it comes to spending our kids and grandkids’ future, so maybe new job creation will remain artificially elevated.
2025 is an election year after all.
