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RBA would “welcome” strong US jobs data, economists say

Capital Economics’ Paul Dales says higher US interest rates will boost inflation through a lower Australian dollar, but it won’t stop the RBA from cutting again. Photo: Louie DouvisThe Reserve Bank of Australia would “welcome” the surge in job numbers in the US, increasing the likelihood of an interest rate rise from the Federal Reserve sooner rather than later and taking some pressure off the central bank to cut again, economists say.
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Data from the US Labour Department at the weekend reported 255,000 jobs were added in the US in July, much higher than the consensus forecast of 180,000. It pushed the market’s pricing of an interest rate hike from the Federal Reserve from around a one in three chance to a near 50 per cent chance.

“This is welcome news for the RBA,” HSBC chief economist for Australia and New Zealand Paul Bloxham said. The central bank would be hoping the US economy was on track in its economic recovery, paving the way for the rate hike cycle to continue, he said. Fed actions could aid RBA

Capital Economics chief economist for Australia and New Zealand, Paul Dales, said the US Fed would end up doing much of the RBA’s work via a weaker currency. In a very low rate environment, a lower currency was the best way to boost inflation, he said.

Mr Bloxham said the RBA have been “reluctant cutters” but inflation, which at 1 per cent is well below its 2 to 3 per cent target range, forced its hand.

In its decision to cut the benchmark interest rate by 25 basis points to a record low 1.5 per cent last week, RBA governor Glenn Stevens said prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy”.

Perpetual head of multi-asset investment strategy Matthew Sherwood said however jobs numbers would not change the RBA’s position on interest rates.

“If the Fed does hike interest rates in December, it might at the margin lower the exchange rate and add support to the domestic economy,” he said.

The Fed were also reluctant to raise rates amid weak global growth susceptible to shocks such as Brexit and Chinese economic concerns.

“The global recovery is extremely weak, outside a couple of pockets, there is pretty much no strength anywhere. The Fed would be very guarded about raising rates a bit too early,” Mr Sherwood said.

Mr Dales said with a rate hike more likely in December than September, any uplift to inflation from a lower currency would need to wait until next year.

“The payrolls data provide a clear sign that the wheels are not falling off the US economy, but the Fed will probably want to wait to see signs that real economic activity is improving after the slowdown in the first half of the year,” he said.

It also meant that the currency, which has proved resilient, buying US76.18¢ at the weekend, supported by its relatively high yield and higher commodity prices, was likely to remain stubbornly around the US75¢, if not higher for the rest of the year, Mr Dales said.

A third rate cut this year may be needed to prevent further appreciation. The market is pricing in around a 50 per cent chance of a cut in November following third quarter inflation data.

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