RBA Slashes Cash Rate; February Unemployment Rate Plummets Against all Odds

With the RBA’s move, the policy rates of all the major central banks, including the Bank of England, the United States Federal Reserve and the Reserve Bank of New Zealand are now effectively at 0.25 per cent.

The RBA announced its decision shortly after the ABS reported an unexpected fall in the seasonally adjusted unemployment rate to 5.1 per cent in February 2020. The ABS has announced a 0.2 percentage points decline in the unemployment rate, against market expectations of no change in the jobless rate in February.

It is worth noting that the unemployment rate remained steady at 5.1 per cent in February 2020 in trend terms, signifying no substantial impact of the recent bushfires or COVID-19 on the February 2020 Labour Force statistics.

Employment Level Surprisingly Improves in February 2020

The seasonally adjusted fall in the unemployment rate was backed by a rise of 26,700 persons in employment to 13,015,100 persons, which was further induced by an increase of 6,700 persons in the full-time employment and 20,000 persons in the part-time employment.

State-wise, Queensland, Western Australia, and Tasmania recorded the largest increases in employment of 14,300 people, 10,900 people and 4,000 people, respectively in February. However, Victoria saw a decrease of 8,800 people in employment.

Though seasonally adjusted unemployment rate dropped in Tasmania (by 0.8 percentage points), Queensland (by 0.6 percentage points) and Western Australia (by 0.6 percentage points), it rose in New South Wales and South Australia by 0.1 percentage points each.

The ABS statistics also revealed a decline in the participation rate by 0.1 percentage points to 66 per cent and a decrease in monthly hours worked in all jobs by 3 million hours to 1,775.4 million hours.

Source: ABS

Westpac Expects Unemployment Rate to Surge to 7% in 2020

Recently, the Westpac Banking Corporation (WBA) notified that it expects the unemployment rate to reach 7 per cent by October 2020, owing to negative shocks from COVID-19 outbreak to the labour intensive sectors like tourism, renovation, recreation and education.

The bank mentioned that this rise in the unemployment rate will occur despite a reduction in participation rate from 66.1 per cent to 65.4 per cent, because of discouraged worker effect.

Besides Westpac, leading economists at other banks are also tipping Australia’s unemployment rate to reach between 6.5 per cent to 7.5 per cent by the end of 2020.

Moreover, the bank has anticipated a recession in the Australian economy this year, with the economy contracting by 0.6 per cent in the first half of the year and experiencing growth of 2.2 per cent in the second half after recovering from the disruption caused by coronavirus.

As per the bank, the Morrison government’s recent $17.6 billion stimulus package will not be sufficiently compelling to avert a recession in 2020. With this regard, the bank has revised its GDP growth projections for March and June quarters to -0.7 per cent and -0.3 per cent, respectively.

Also Read Morrison Government’s Next Major Fiscal Stimulus – How are Things Panning Out?

RBA Unlikely to Increase Interest Rates Until Economy Advances Towards Full Employment

In its latest update on reduction in the cash rate to 0.25 per cent, the RBA mentioned that it is unlikely to increase interest rates until any progress is made towards the full employment level.

The Australian share market tumbled even after the RBA’s rate cut decision, closing the trading session at 4782.9 points, with a fall of 3.4 per cent. Besides, all big four banks closed in red territory.

Moreover, the central bank highlighted that though it was expecting to make progress towards full employment prior to the coronavirus hit, it now anticipates a more gradual progress. The central bank is anticipating considerable job losses in the current scenario and believes that the scale of these losses will rely on the ability of businesses to keep workers on during this challenging period.

In addition to announcing a cash rate reduction, the central bank has also announced the following measures to avert the adverse economic effects from coronavirus pandemic:

• Targeted the yield on the 3-year Australian Government Securities at about 0.25 per cent.
• Declared a term funding facility for the banking system with support for business credit, particularly to small and medium-sized businesses.
• Made an adjustment to the cash rate on exchange settlement balances.

In line with its previous statements regarding the 0.25 per cent cash rate, the RBA has planned to commence quantitative easing shortly by purchasing government bonds in the secondary market. The central bank will buy the semi-government securities and government bonds to achieve its target of 0.25 per cent yield on 3-year Australian Government bonds.

The bank has also decided to provide lenders with funding of minimum $90 billion if they raise funding to medium and small-sized business. The proposal will be complemented by the federal government’s latest pledge of allocating up to $15 billion to facilitate smaller lenders to resume supporting the nation’s small businesses and consumers.

Though the RBA and the Morrison government are sparing no effort to restrain the Australian economy from going into recession, the risk of economic downturn seems to be surging amidst lockdowns and travel restrictions as COVID-19 crisis escalates. Moreover, the fall in the unemployment rate is expected to reverse swiftly in the coming months in response to coronavirus disruption.