Talk of May interest rate hike

7 April 2005

Homeowners' relief that mortgage payments will stay on hold may be short lived after strong labour force figures today fuelled expectations of another rate hike.

The decision yesterday to keep interest rates on hold was a comfort for homeowners but that joy may last only a month after jobs data hinted at a continuing strength in the economy.

The Reserve Bank of Australia (RBA) left the official cash rate at 5.5 per cent following a 0.25 of a percentage point rise in March.

But economists are predicting the pressure could once again be on for a rate hike after March labour force data showed the jobs market continued to steam ahead.

While the jobless rate remained steady at its 28-year low of 5.1 per cent, the number of people in the workforce jumped well above market expectations, to a massive 57,800 - although most of the rise was in part-time jobs.

The number of people looking for work also rose, up by 5,000 from the previous month to 539,500.

Employment Minister Kevin Andrews described the figures as another sign of the Howard government's strong economic management.

Mr Andrews said 1.6 million jobs had been created over the past nine years, including 330,000 over the last 12 months.

Despite this record, he said the government would continue to pursue workplace changes to further boost job numbers.

"(We) will continue to pursue further economic and workplace relations reforms to create even more jobs for Australians and lock in low unemployment," Mr Andrews said.

But pride over their strong jobs record could backfire for the government, with economists predicting the data would increase the chances of an interest rate rise next month.

RBC Capital Markets senior economist Michael Every said the figures increased the risk the RBA may raise rates again soon.

"The Reserve Bank of Australia did not move yesterday, but it still remains focused on the labour market," Mr Every said.

"This report suggests that there is yet a risk that they may move again."

UBS chief economist Scott Haslem warned the data would heighten speculation of a rate move in May.

"At present, we remain in favour of a final move up in rates over coming months," he said.

But AMP Capital chief economist Shane Oliver suggested it was possible the labour market was lagging behind the rest of the economy, which was already starting to slow.

"The labour market is one of the last indicators to turn down, so we've already seen the economy slow down - particularly in the housing sector - and you would think that it is only a matter of time that we'll see a slowing in (jobs)," he said.

Mr Oliver said the data - on its own - was consistent with another rate rise by the RBA but he tipped the central bank would wait for inflationary signs before moving again on the matter.

"I think the Reserve Bank will probably need to see clear evidence of wages growth coming through to inflation before they move again," he said.