The prospects for Australian interest rates are trending on the downside, according to JP Morgan.

Tom Kennedy, Economics and Policy Researcher at the bank, noted today’s unemployment rate of 5.9% is at the upper end of the Reserve Bank’s 5-6% forecast in February.

Importantly, said Kennedy, the latest unemployment rate is 0.2% above the same time last year which means that any prospective growth in employment has clearly stalled.

Kennedy noted the sample rotation methodology applied by the ABS probably weighed on the reported figure. He noted that “the incoming rotation group had a higher unemployment rate (original terms) than the existing sample, while the outgoing group had a relatively larger number of employed individuals”.

In view of that, however, the methodology is in place to emphasise more recent changes in the labour market, so the lower figure is likely representative of poor employment figures in February.

Today’s negative result was exacerbated by a higher rate of underemployment in February, said Kennedy.

He also notes that wage growth has been negatively correlated to underemployment over recent years. With wage growth in Australia anaemic, the latest rise in underemployment will not be helpful in this regard.

Kennedy notes that it will take more than one month of data to force a significant policy shift from the RBA. He said the RBA is further constrained on interest rates by recent low volatility in the AUD/USD exchange rate and financial stability concerns in the housing market.

“We still see the cash rate biased lower in Australia. While this might take some time to play out, today’s data are a salient reminder that underlying fundamentals in the Australian economy are certainly not consistent with higher rates anytime soon,” Kennedy said.

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