Unemployment in Australia has fallen to its lowest level in 30 years, sparking market fears of a further hike in interest rates to curb inflationary pressure and a massive drop in stocks.

With investors already spooked by Wall Street falls, the jobs figures contributed to a 2.35 percent plunge on the Australian Stock Exchange — the biggest one-day loss since the September 2001 attacks on the United States.

“It’s all about interest rates; fears of hikes have heightened and that’s what spooked the market,” said Aequs Securities head of institutional trading Ric Klusman.

The May jobless rate of 4.9 percent was the lowest in Australia since November 1976, according to the Department of Employment and Workplace.
The figure came in well below market expectations of an unchanged unemployment figure, which stood at 5.2 percent in April.

According to the Australian Bureau of Statistics, the number of people employed jumped a seasonally-adjusted 56,000 to 10.14 million, compared with consensus forecasts of a 12,500 rise. It was the 12th time the data showed more than 10 million employed in the country.

Prime Minister John Howard described the figures as very encouraging.
“I am delighted that we have finally got the unemployment rate with a four in front of it,” he told reporters in Sydney.
“It is only one month’s figures but the symbolism of it is important and the long-term trend is very encouraging.”

Analysts warned, however, that if the jobless rate continued to fall, the Reserve Bank of Australia could be forced to again raise interest rates to curb inflationary pressure in the economy.

The data, and fears that interest rates will rise in the United States, caused the key SP/ASX 200 to drop 118.3 points to close at 4,907.2, well-off the May 11 record close of 5,364.5. The broader All Ordinaries Index shed 113.4 points or 2.27 percent to close at 4,878.5.
“Certainly financial markets are pricing in the risk that rates will have to rise,” Craig James, chief equities economist at CommSec told AFP.

“If this month’s data is followed by another strong set of jobless figures, then the Reserve Bank would probably have to step in with a modest rise in interest rates.”
Mark Rodrigues, ANZ Banking Group senior economist, agreed.
“With core inflation in the top half of the RBA’s target band and economic growth around potential, this supports our view that interest rates will need to rise again this year,” he said.

The RBA raised its official cash rate by a quarter percentage point in May — the first hike in the key rate in 14 months.
The move was seen as a preemptive strike to prevent strong global economic growth, high oil prices and upward wage pressures from feeding through to the Australian economy and fuelling inflation, which stands at 3 percent.

On Wednesday, the RBA left its cash rate unchanged at 5.75 percent following its monthly policy meeting but economists said the bank maintains a tightening bias that was likely to have been reinforced by the latest economic growth figures. The economy grew by a stronger-than-expected 0.9 percent in the March quarter, bringing the annual growth rate to 3.1 percent.

SOURCE: AFP