Australia on Thursday reported an unexpected drop in its jobless rate to 4.2 per cent last month just as the International Monetary Fund warned of a potential need to raise interest rates further to combat inflationary pressures.
Unemployment dropped from 4.3 per cent in May, with employment rising by a net 29,800, easily beating forecasts of a 10,000 job increase, according to data released by the Australian Bureau of Statistics.
The report coincided with an IMF’s warning to the Reserve Bank of Australia: “With the risks to inflation on the upside, the RBA should be prepared to tighten quickly if leading indicators suggest that domestic demand will not slow as expected or the outlook for inflation deteriorates”.
The IMF shares the Reserve Bank’s view that despite interest rates at 7.25 per cent, softer retail sales, soaring rents, record petrol prices and weak housing financing data, the Australian economy could prove to be stronger than anticipated because of the boom in commodity exports.
Australian consumers are concerned too. According to the Westpac-Melbourne Institute Inflation Expectation Survey, most people expect inflation to average 5.9 per cent over the year ahead, well above the Reserve’s comfort band of 2 to 3 per cent.
According to Justin Smirk, senior economist with Westpac, Thursday’s numbers highlight that despite the negatives, there is a small risk of another rate increase soon. “We have a tight labour market at this stage so the inflation risk is real but domestic demand in slowing,” he said
John Peters, senior economist with the Commonwealth Bank of Australia, said the latest data proves that the economy is not falling into a black hole and he has factored in a rate rise. “We’re not quite out of the monetary policy woods yet,” he said.
Mr Peters said offsetting negatives like high petrol and food prices are some major positives such as tax cuts and high commodity prices. “The Australian economy might not be slowing fast enough to drive the inflation rate back into the target zone.”
Australia will report quarterly inflation figures in two weeks.