The Australian Unemployment rate is back where the economy needs it to be. Some analysts are expecting stagnant Inflation figures out from the Australian Economy. However, a lower Australian Unemployment rate is often inversely correlated with the Australian Consumer price Index (CPI). This should lead to stronger domestic inflation figures; as more jobs create stimulus.
In economics, the Phillips curve shows a historical inverse association between rates of unemployment and subsequent rates of inflation that result in the Australian economy. This meaning that a decrease in the unemployment rate or improved levels of employment in the Australian economy will correlate with higher rates of inflation.
At current expectations the market expects a further fall in Australia’s current Inflation levels. Currently the Inflation rate is sitting on 1.7%, this is in fact below the current 2-3% target of the Reserve Bank of Australia (RBA). Therefore, the current levels of inflation leave the door ajar for potential cuts to Australia’s Interest rate. The market is expecting that the CPI figure on Wednesday to fall further to 1.3%; which will induce the market to expect cuts on the first Tuesday of May.
Currently the RBA’s stance on interest rate is that they are willing to cut rates again, however, they must proceed with caution. Over inflated house prices and subsequent increasing debt levels are a key concern in Australia’s economy.
The Unemployment Rate in Australia currently sits on 6.1%, falling from last month’s 6.2%. The employment levels have improved by 20 basis points since late 2014. This should mean that Australia’s Inflation rate should increase inversely with this employment change.
The reason why this is so important is that the RBA will only consider Interest Rate cuts whilst inflation sits below the RBA targets. In regards to the CPI figures due out tomorrow, anything above the expectations of 1.3%; the AUD should gain against the Majors. This will indicate to the market that there is less probability of a cut in May.
The 30 Day Futures Market is currently suggesting a 57% chance that rates will be cut. This was dramatically decreased after the positive employment figures out of Australia, last week.