(Bloomberg) -- Australian employment unexpectedly declined in October, rekindling the prospect for additional interest-rate reductions and sending the local currency lower.

Key Insights:

  • Australia’s central bank is forecasting unemployment to hold around 5.2% through to the end of next year and for wage growth to remain at 2.3% through 2021
  • This suggests an acceptance that its strategy of trying to push the jobless rate down to 4.5% -- estimated full employment -- to spark wage growth and return inflation to the 2-3% target is unlikely to come to pass for a while
  • The Reserve Bank has reduced interest rates three times since June to try to boost hiring and investment; to date, outside of the housing market, the easing has gained little traction
  • RBA chief Philip Lowe has one other potential ace -- the currency -- and part of his decision to resume rate cuts was to prevent the Aussie dollar rebounding in response to renewed easing by the Federal Reserve. The U.S. central bank has now signaled it’s on hold -- after cutting 75 basis points, the same as the RBA -- and Lowe left rates unchanged last week
  • Still, with the cash rate at 0.75% and RBA officials suggesting the lower bound of policy is around 0.25%-0.5%, talk Down Under has inevitably turned to unorthodox measures. Lowe is due to speak on the subject later this month
  • Australia’s labor market has remained remarkably resilient over the past 12 months, with hiring holding up even as the economy decelerated sharply, expanding at an annual 1.4% in the most recent reading, about half its estimated speed limit
  • Yet strong employment has failed to translate into a lower jobless rate as new positions are filled by new entrants to the labor market
  • The RBA is betting that a combination of its rate cuts and government tax rebates will eventually encourage consumers to spend and keep the economy ticking over. Rising house prices and the associated wealth effect are expected to help that cause
  • Money markets are pricing in some chance of another RBA rate cut in the first half of next year

Market Reaction

  • The Aussie dollar slipped to 68.11 U.S. cents at 11:33 a.m. in Sydney from around 68.38 pre-data

--With assistance from Tomoko Sato.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Edward Johnson

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