RBA's Bullock: Tightness remains in labour market
Reserve Bank of Australia (RBA) Governor Michele Bullock spoke on Monday in the Australian parliament, saying that labor market conditions have eased slightly, the unemployment rate is up and tightness remains in labour market.
Key quotes
Recent interest rate cuts are expected to support spending by households and businesses.
Labour market conditions are close to full employment.
Recovery in household consumption growth is forecast to be sustained as real incomes continue to grow.
Since the August meeting, domestic data have been broadly in line with expectations, if not slightly stronger.
The economic outlook continues to be clouded by uncertainty.
Labour market conditions have eased a little, with unemployment rising slightly, but some tightness remains.
The RBA must remain alert to changing circumstances and be prepared to respond if necessary.
The Board will remain attentive to data and the evolving assessment of risks to guide decisions.
There may be more excess demand in the economy, and labour market outcomes may be stronger than expected.
Monetary policy is well placed to respond if international developments materially impact Australia’s economy.
There is also a risk that the recent pick-up in domestic economic growth is not sustained.
The RBA has made real progress in bringing inflation down, but the task is to ensure it stays within the target sustainably.
Market reaction
At the time of writing, the AUD/USD pair is trading 0.07% lower on the day to trade at 0.6588.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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