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European turmoil to weigh on rates decision

Continuing weak employment growth does not confirm the Reserve Bank will deliver another pre-Christmas rate cut, but the turmoil in world financial markets could influence the central bank, economists say.

While the unemployment rate technically fell from a seasonally adjusted 5.3per cent to 5.2per cent, this is only because it was revised up from a month ago. It comes as international turmoil helped strip about $30billion in value from Australian shares, as the market dropped more than 2per cent.

Markets panicked after Italy's main borrowing rate breached 7per cent, taking it to the level where Greece, Portugal and Ireland required bail-outs. But as the third-largest economy in Europe, Italy's $US2.6 trillion debt is considered too large for other European countries to absorb.

A default could lead to the disintegration of the euro currency used by 17 nations or a debilitating recession.

Meanwhile, new Australian Bureau of Statistics data showed the domestic economy remained comparatively strong. It added 10,100 jobs in October, made up of a 20,000 increase in full-time positions and a 9900 fall in part-time jobs.

ANZ economist Julie Toth said employment growth, at 0.1per cent a month, remained weak despite the encouraging headline result. ''This is the weakest annual growth rate since October 2009, and less than the 10,000-12,000 jobs per month needed to prevent the unemployment rate from rising,'' she said.


''The unemployment rate has bounced between 5.1per cent and 5.3per cent for the past four months, and has now been at 5per cent or higher for the past six months. We expect the unemployment rate will drift up toward 5.5per cent, slowly by the middle of 2012.'' Ms Toth said the jobs figures were the key piece of information that the Reserve Bank would receive before their next board meeting on December 6.

''It does not provide conclusive support to the case for a second cut to the cash rate in December, as is currently more than priced in by markets. The chance of another rate cut before Christmas will continue to depend significantly on a worsening in the European crisis,'' she said.

Prime Minister Julia Gillard said that while Australia was not immune from global economic uncertainty, the nation's economy was resilient because of strong resource prices.

''There are other sectors of the economy under pressure, like manufacturing, and as a Government we want to make sure that we come through this resources boom with a strong diversified economy,'' she said.

Commsec chief economist Craig James said the result was heartening, but it was more a snapshot of how the economy looked four to five months ago.

''Clearly it takes time to take on new staff, from the start of the interviewing process to when the new starters finally commence work. But given the fact that job advertisements have softened in six of the last seven months, the jobless rate will probably edge towards 5.5per cent over the next few months,'' he said.

The data also ''confirms the economic hierarchy in Australia - Western Australia and the ACT lead while there is a fair gap to the rest''.

The ACT still has the nation's lowest unemployment rate, at 3.8per cent in trend terms, down from the 4per cent reported a month ago.

''The jobs data means that there is no imperative for the Reserve Bank to cut rates again in December. Still any rate cut in December was always going to be more a function of the situation in Europe,'' Mr James said.

''So if Europe implodes, the Reserve Bank may be forced to cut rates in December. In our judgment - and assuming Europe still muddles through in the next few weeks - the next interest rate cut won't occur until February.''

with agencies