RBA needs to cut interest rates for wages to rise, says economist

RBA needs to cut interest rates for wages to rise, says economist

"The board will be paying close attention to developments in the labour market at its upcoming meetings".

Although the Reserve Bank of Australia didn't cut interest rates at today's meeting, a weaker labor market could force it to cut rates, Marcel Thieliant, an economist at Capital Economics, said.

At the same time, the RBA characterized the labor market as "strong" and said it expected the unemployment rate to ease to 4.75 percent in 2021 from current levels of 5 percent where it has stayed for nearly six months now.

The RBA has been watching Trump's trade war threats and actions for more than a year.

The news saw the Aussie dollar jump 0.7% back above 70 U.S. cents around 70.40 USA cents.

The on-hold decision comes just 10 days before a closely-fought national election where Prime Minister Scott Morrison is campaigning on being a strong economic manager.

"With the meeting priced 40% for a cut and the A$ at multi year lows, we are not surprised by the reasonable jump in the Australian Dollar given no change in policy", says Robert Rennie, a foreign exchange strategist with Westpac.

"The unemployment rate has been broadly steady at around 5% over this time and is expected to remain around this level over the next year or so, before declining a little to 4.75% in 2021", he said. Looking forward, inflation is expected to pick up, but to do so only gradually.

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However, he recognized that there had been slow progress in reducing unemployment over the past six months.

"The Australian labour market remains strong", says RBA Governor Stephen Lane in a statement.

The RBA revised down its growth forecast to 2.75 percent for 2019, from previous outlook of 3 percent.

The board "recognised that there is still spare capacity in the economy and that a further improvement in the labour market is likely to be needed for inflation to be consistent with the target", Lowe said in the concluding paragraph of his statement.

It's been more than two years since the last cut.

For the Australian dollar as a whole, this may benefit in the coming months from what appears to be a relatively hawkish RBA.

Tuesday's central bank developments should have been a big boost for AUD/INR, which is expected to rise in the coming months, but the shine has been taken off somewhat by a grim set of Australian retail sales figures and the aforementioned developments on US-China trade, both coming in the past 36 hours.

The Reserve Bank has held its fire on interest rates, keeping the cash rate on hold. "We have pencilled in a cut for June but concede that the RBA may wait a bit longer given that there is only one month's worth of jobs data to be released between now and then", says Oliver.

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