Resilient job market reduces rate cut probability: Experts

While the Australian unemployment rate remained unchanged, experts are becoming less optimistic we'll see many more rate cuts this year.

The Australian labour market remained robust in May, with the unemployment rate sitting at 4.1%, Australian Bureau of Statistics (ABS) data shows.

"Despite employment falling by 2000 people this month, it's up 2.3% compared to May 2024, which is stronger than the pre-pandemic, 10-year average annual growth of 1.7%," ABS head of labour statistics Sean Crick said.

"This fall in employment, combined with a drop in unemployment of 3000 people, meant that the unemployment rate remained steady at 4.1% for May."

However, this result may restrict the Reserve Bank of Australia's (RBA) flexibility in cutting rates throughout the remainder of the year.

VanEck head of investments and capital markets Russel Chesler said: "The market is currently predicting three rate cuts this year, which would see the RBA cash rate reduced to 3.10%. In our view, the market is getting ahead of itself."

"Based on current economic data, we do not think any more than two cuts by the end of the year is justified, and only one rate cut is actually warranted. The situation in the US provides an interesting point of reference.

"After the Federal Reserve held rates... the market is now predicting two rate cuts in the US for the remainder of the year... To us, this seems a more sensible approach."

Australia has also seen continued strength in key sectors like retail, property, and consumer spending, which will hardly drive a cut should these metrics continue to surge.

"These metrics do not indicate a weakening economy, and for further cuts to occur without risking inflation to spike, we would need to see a range of measures falling," Chesler added.

Meanhwhile, State Street Global Advisors APAC economist Krishna Bhimavarapu said despite a strong rise in full-time employment, other factors continue to be disruptive.

"A large contraction in the flood-impacted New South Wales could explain the downside surprise, but of note is a similar decline in Victoria too," Bhimavarapu said.

"The big picture is that this data may not be sufficient to alter the dovish turn made by the RBA, as the strong labour market is not translating into strong growth (yet). Absent any surprise in inflation data next week, the RBA could very well consider a July rate cut."

And, while AMP economist My Bui said the numbers don't add to the argument for more rate cuts, she still expects to see a few.

While the market has dialled down chances of a July rate cut from 81% to 76%, AMP still believes the economy needs a boost from easier monetary policy and predicts there will be a cut in July, followed by more in August, November and February next year.