Unemployment drops back to 4.2% in July

The underemployment rate (people who aren't working as much as they want to be) dropped to 5.9% while the number of employed people increased by 20,000.

It means unemployment is back where it was in May, and while unlikely to be a major source of alarm these results are likely to be highly scrutinised by those looking to determine when the next RBA cut will be.

The dust may still be settling from the August monetary policy decision but already the attention of economists and mortgage holders may be turning to the next one in the waning days of September.

Markets are split on the next RBA meeting in September, but as of 11 August a slight majority of traders are tipping successive 25 bps cuts, which would take the cash rate to 3.35%.

However, economists from all of the big four banks are currently predicting a September hold before a final cut of 2025 in November, falling on Melbourne Cup day.

RBA forecasts released on Tuesday had the unemployment rate at 4.3% by September, then holding steady until the end of 2027.

In her appearance on the Savings Tip Jar podcast, CommBank senior economist Belinda Allen said she believes the September decision could "come down to the labour market".

"When we talk about why would [the RBA] cut in September...it would be a shock move higher in the unemployment rate," she told the podcast.

"That's, for me, the one thing that could see the RBA cut earlier... if it gets closer to say, 4.5%, then you start to think about earlier rate cuts and more rate cuts."

Cup day cut tradition to continue?

In seasonally adjusted terms, the unemployment rate has been between 4 and 4.3% since December last year.

During that time inflation has continued to moderate - annual trimmed mean inflation (excluding volatile prices) dropped from 3.2% in December to 2.7% in July.

Some economists have interpreted this as suggesting that despite unemployment persistently well below pre-Covid levels, an unemployment rate just above 4% isn't necessarily inflationary.

While tightening from 4.3% to 4.2% will be noted, the labour market is still relatively steady so this news is unlikely to prompt a dramatic change in the economic outlook.

Nonetheless no sharp increase in unemployment could as Ms Allen said point away from a September cut, which may leave the door open for what would be the fourth Melbourne Cup Day rate change since 2019.

"February, May, August and November...the RBA generally moves in those board meetings because the have the most up-to-date view on the outlook," Ms Allen told the podcast.

Since 1991, 14% or about 1-in-7 cash rate movements have occurred in November. 

RBA 'confident and comfortable' in outlook

Ms Allen said her biggest takeaway from the statements by the monetary policy board and Governor Michele Bullock addressing media after the decision was the "level of confidence" in the outlook.

"It felt the most confident and comfortable [the RBA] have been around the interest rate outlook and around the inflation outlook," she said.

"They were reluctant cutters, if you remember back to February."

This time, it nine out of nine board members opted to cut the cash rate, which Ms Allen correctly called. It was more split in July with a 6-3 vote in favour of a hold.  

The Board was reticent in August about providing concrete projections moving forward, but the central bank's forecasts for unemployment and inflation over the next couple of years are underpinned by the assumption of "a couple more cuts".

"The forecasts imply that the cash rate might need to be a bit lower than it is today to keep inflation low and stable and employment growing, but there is still a lot of uncertainty," Ms Bullock told media on Tuesday.

"Monetary policy remains well positioned to respond to shocks that could come out way and the board will keep doing what it needs to do to keep inflation down and maintain a healthy jobs market."