When the RBA cut rates by 25bp this week, it made it painfully clear that any further loosening of policy settings would be modest given the strong labour market. The Bank's concerns seem to be well founded, with new data showing that jobs growth accelerated sharply in January. To be sure, the tight labour market hasn't kept wage growth from easing, and we expect that will remain the case. However, with productivity set to remain anaemic, unit labour cost growth won't fall to a level consistent with the RBA's 2-3% target anytime soon. The upshot is that risks are tilting towards rates being cut more slowly than we expect, or not as far.
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