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Unemployment rate sees surprise drop

The unemployment rate has seen a surprise drop by 0.1% to 5.6% in September, according to the Australian Bureau of Statistics (ABS).

The trend unemployment rate remained at 5.7%. The ABS reports that the number of people unemployed decreased by 14,700 people to 697,100 in September. An additional 9,100 people became employed, with total employed now standing at 11,645,800. Seasonally adjusted labour force participation fell 0.1% to 64.9% in September – its lowest level since November 2006 according to Chris Weston from IG Markets.

The data suggests the Reserve Bank has one reason not to drop interest rates anytime soon, and economists are likely to revise their expectations to no change to the official cash rate next month. But much will depend on the consumer price index (CPI) data for the September quarter. Inflation over the last three quarters has been very low, and strong data in the latest quarter would be needed to keep inflation within the RBA’s target band of between 2-3%. CPI data will be released on October 23.

Economists are now suggesting that we may not see another rate cut, if any, until at least February next year, unless the CPI is very low. The next rate move could also be upwards, as the RBA moves to rein in the rapid rise in house prices.

The RBA will also be keeping an eye on bank lending practices, with some suggestions that the big four ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) may be tempted to relax lending criteria in an effort to increase their market share and grow earnings.

Foolish takeaway

The chances of a rate cut are less likely now, meaning mortgage borrowers are unlikely to get an early Christmas bonus from their lenders.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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