Jobs growth points to Aussie rate rises

Photo / Mark Mitchell

Employment in Australia is headed for the biggest annual increase on record, boosting prospects of an acceleration in wage gains that forces the central bank to resume raising interest rates.

Payrolls soared by 366,000 in the first 11 months of this year to 11.4 million, the most since records began in 1978 and 27,000 more than the previous high in 2006. The jobs data released yesterday contrasted with a report last week showing growth in the third quarter was the slowest since the end of 2008.

"Labour statistics are probably the best guide to current conditions in the economy," said Paul Bloxham, chief economist at HSBC Holdings. "One only needs to look back to the last time inflation got above the target band to find that the best real-time indicator of what was going on was the labour market."

The Reserve Bank of Australia could enter 2011 with an economy nearing full employment, which may help tip what policy makers have called a "finely balanced" debate in favour of those urging tighter policy. Governor Glenn Stevens has espoused preemptive moves, including a November 2 rate boost, saying central bankers rarely regret lifting borrowing costs too soon.

"We expect that the unemployment rate will fall further in the next few months," Bloxham said. "As a result, rates will need to rise further, and we expect multiple hikes next year."

Investors are betting there is a 58 per cent chance the central bank will raise rates by a quarter percentage point in May.

Stevens this week said that "after the significant decline last year, growth in wages has picked up somewhat, as had been expected. Some further increase is likely over the coming year".

Payrolls gained 54,600 in November from a month earlier, the statistics bureau said in Sydney yesterday, more than double the median forecast by economists. The jobless rate fell to 5.2 per cent from 5.4 per cent.

The Australian dollar rose as high as US98.84 cents in Sydney late on Thursday, from US97.93 cents just before the report. Last month, the currency reached parity. The S&P/ASX 200 Index of shares advanced 0.9 per cent to 4741.3, the highest closing level in about a month.

The employment report showed the number of fulltime jobs advanced 55,100 in November and part-time employment was little changed, slipping by 400. Australia's participation rate, which measures the labour force as a percentage of the population over 15, increased to a record 66.1 per cent in November from 65.9 per cent a month earlier.

The data is "consistent with a very tight labour market" and there is a risk unemployment will fall quickly through 5 per cent, a level that in the past has been accompanied by accelerating wage pressure, said Stephen Roberts, a senior economist at Nomura Australia.

"The RBA will return to hiking the cash rate earlier than the market is currently allowing," Roberts said, predicting a quarter-point increase to 5 per cent in March. The RBA's next meeting on borrowing costs is scheduled for February 1.

Employment is escalating as energy and resources companies increase investment and hiring to meet demand from China.

The report showed unemployment fell to 4.5 per cent in Western Australia, site of Chevron's A$43 billion ($42 billion) Gorgon liquefied natural gas project, and 5.5 per cent in Queensland, where BG Group will begin building a A$15 billion LNG venture, generating 5000 construction jobs.

BG, Chevron, Royal Dutch Shell and ConocoPhillips are among energy companies investing about A$200 billion in proposed LNG projects in Australia.

The hiring surge threatens to boost inflation, which the central bank aims to keep in a range of 2 per cent to 3 per cent. The consumer price index in the third quarter rose 2.8 per cent from a year earlier.

The central bank has raised its overnight cash rate target seven times since October 2009, in contrast with the US Federal Reserve's policy of a benchmark rate, near zero since December 2008. That divergence has contributed to a 10 per cent increase in the local dollar versus the US currency this year.

Assistant RBA Governor Philip Lowe said policymakers' most recent rate increase was an "early and modest adjustment" aimed at averting "uncomfortably high" inflation and avoiding a "more substantial increase in interest rates later on".

Australian wages rose 3.5 per cent in the third quarter from a year earlier, the most in a year, as salaries in private industry outpaced government pay gains for the first time since the start of the global financial crisis.

Nomura's Roberts said the RBA would be "rather uncomfortable" with wage inflation rising to 4.5 per cent, a level that might be reached next year on the current trajectory.

- Bloomberg