Australia’s unemployment rate is expected hold steady in May but economists warn an expected drop in the jobless rate later in the year could herald more interest rate rises.

Official data due next Thursday is expected to show total employment increased by 15,000 in May with the unemployment rate remaining at 5.4 per cent, the median of 11 economists surveyed by AAP shows.

Economists also expect the participation rate – the proportion of the population active in the labour market – to remain steady at 65.2 per cent.

Commonwealth Bank economist John Peters said he expected full employment – an unemployment rate of under five per cent – to be reached within 18 months.

Mr Peters said wages would continue to grow and add to inflationary pressures that could lead to the Reserve Bank of Australia (RBA) lifting the cash rate to six per cent by mid 2011.

The cash rate is presently 4.5 per cent after the RBA held the rate steady at its June board meeting, but most economists expect the central bank to take the cash rate to five per cent by late 2010.

“Employment will be one of the factors the RBA will be keeping an eye on.

“Before the financial crisis, unemployment dropped below four per cent and the RBA kept lifting rates,” Mr Peters said.

“We see rates moving into restrictive territory next year.”

From October last year until May, the RBA lifted its benchmark rate six times.

Mr Peters said Commonwealth Bank estimates showed the number of total employed persons probably increased by between 15,000 and 20,000 in May, while the jobless rate would increase a touch to 5.5 per cent.

“Generally, we expect employment growth to continue to trend higher and pick up pace as the economy picks up momentum as well,” he said.

The jobless rate has so far remained well below federal government forecasts for unemployment to rise to 6.75 per cent in 2010.

Nomura Australia economist Stephen Roberts predicted a 5.5 per cent jobless rate for May as a result of government infrastructure spending slowly being withdrawn from the economy.

“Public sector employment, the growth in it, is going to be very slow indeed over the next few months while private sector employment is still reflecting the underlying strengthening in the economy,” he said.

Mr Roberts said he expected a few months of steady unemployment before the rate started to drop to around five per cent by the end of 2010.

TD Securities senior strategist Annette Beacher said she expected the unemployment rate to fall to 4.5 per cent in 2011 as Australia’s terms of trade improved over the next year.

She predicted the May jobless rate to hold steady at 5.4 per cent.

Ms Beacher also said the stronger terms of trade and employment outlook would mean the RBA’s cash rate would rise to six per cent by June 2011.

“If our terms of trade are truly expected to surpass the 2008 peak, then you can only draw the conclusion that we will be at a more than fully employed situation.

“Then the RBA’s work isn’t done yet.”

AAP eb/jmc/dlm

Eds: Story first issued on Friday June 4

By Eoin Blackwell

SYDNEY, June 6 AAP – Australia’s unemployment rate is expected hold steady in May but economists warn an expected drop in the jobless rate later in the year could herald more interest rate rises.

Official data due next Thursday is expected to show total employment increased by 15,000 in May with the unemployment rate remaining at 5.4 per cent, the median of 11 economists surveyed by AAP shows.

Economists also expect the participation rate – the proportion of the population active in the labour market – to remain steady at 65.2 per cent.

Commonwealth Bank economist John Peters said he expected full employment – an unemployment rate of under five per cent – to be reached within 18 months.

Mr Peters said wages would continue to grow and add to inflationary pressures that could lead to the Reserve Bank of Australia (RBA) lifting the cash rate to six per cent by mid 2011.

The cash rate is presently 4.5 per cent after the RBA held the rate steady at its June board meeting, but most economists expect the central bank to take the cash rate to five per cent by late 2010.

“Employment will be one of the factors the RBA will be keeping an eye on.

“Before the financial crisis, unemployment dropped below four per cent and the RBA kept lifting rates,” Mr Peters said.

“We see rates moving into restrictive territory next year.”

From October last year until May, the RBA lifted its benchmark rate six times.

Mr Peters said Commonwealth Bank estimates showed the number of total employed persons probably increased by between 15,000 and 20,000 in May, while the jobless rate would increase a touch to 5.5 per cent.

“Generally, we expect employment growth to continue to trend higher and pick up pace as the economy picks up momentum as well,” he said.

The jobless rate has so far remained well below federal government forecasts for unemployment to rise to 6.75 per cent in 2010.

Nomura Australia economist Stephen Roberts predicted a 5.5 per cent jobless rate for May as a result of government infrastructure spending slowly being withdrawn from the economy.

“Public sector employment, the growth in it, is going to be very slow indeed over the next few months while private sector employment is still reflecting the underlying strengthening in the economy,” he said.

Mr Roberts said he expected a few months of steady unemployment before the rate started to drop to around five per cent by the end of 2010.

TD Securities senior strategist Annette Beacher said she expected the unemployment rate to fall to 4.5 per cent in 2011 as Australia’s terms of trade improved over the next year.

She predicted the May jobless rate to hold steady at 5.4 per cent.

Ms Beacher also said the stronger terms of trade and employment outlook would mean the RBA’s cash rate would rise to six per cent by June 2011.

“If our terms of trade are truly expected to surpass the 2008 peak, then you can only draw the conclusion that we will be at a more than fully employed situation.

“Then the RBA’s work isn’t done yet.”

AAP