Australian Unemployment Reaches 3 year Low

The Australian unemployment rate dropped to its lowest reading in 3 years in figures posted for the month of August, strengthening the case for an Australian interest rate cut in the coming months with the weakness shown by the country’s job market. In terms of seasonal adjustments, the country’s unemployment rate fell from July’s 5.7% to 5.6% in August, fully below the 6% level orbited through-out last year, the government statistician said on Thursday. The slump in unemployment came amid the fall of almost 4,000 in job creation for the month of August which was matched by a drop in the number of people in need of work during the month.

"The drop in the jobless rate suggests there's enough activity in the economy to keep the labour market ticking over. On that alone, the RBA would not be cutting rates again," said Michael Blythe, chief economist at Commonwealth Bank. "However, underemployment is still high and there's little sign the drop in unemployment is generating stronger wages growth and thus inflation."

There is also a persisting slack in the job market, which will result in a weak growth rate for wages and the rate of inflation. A statistician also stated that the underemployment rate reached a record high of 8.7% in the month of August. While full-time positions climbed 11,500 during the month, it was not enough to make up for a drop in July. All of which could keep wages growth at record lows and feed through to muted demand and confidence, a worrying trend that might force the Reserve Bank of Australia's (RBA) hand once again.

"You wouldn't expect on these numbers, wages growth pushing back up anytime soon," said Ben Jarman, Sydney-based economist at JP Morgan. "We still think there's enough spare capacity in the market to keep inflation low and put pressure on the RBA to lower rates over time."

Currency investors reacted to the mixed report and pushed the Australian dollar about 20 ticks lower to $0.7450. Debt markets imply a 30 percent chance of another cut in rates by Christmas.

"This indicates that there is plenty of spare capacity in the labor market. And it underpins both incredibly weak wages growth and below target inflation," said Gareth Aird, an economist with CBA. "Wages growth is unlikely to lift until labor-market underutilization is gobbled up," he added.

The Reserve Bank of Australia (RBA) has previously cut rates two times since the start of 2016 to combat falling inflation. The RBA has also projected that inflation will not rise above its 2-3% target band in the coming years, this means that interest rates are more likely to edge lower than higher.