Wages data crucial for RBA decision on future interest rates

The Reserve Bank of Australia will want to see evidence of employees taking home higher pay when crucial wages data are published on Wednesday, in order for the central bank to consider moving towards lifting interest rates.

The Reserve Bank has said it is expecting a gradual pick up in wages growth as the labour market tightens. Wages in the US, Japan and Europe have strengthened recently as employers compete to attract and retain workers as those economies face full employment.

Market economists on average are forecasting a 2.3 per cent annual rise in local wages when the Australian Bureau of Statistics releases pay data on Wednesday morning.

HSBC chief economist for Australia Paul Bloxham said “any upside to that would be encouraging” and even 2.3 per cent growth would be welcomed.

Wages growth in major economies.
Wages growth in major economies.

RBA

“If it rises a bit faster than that, then maybe the RBA could move a bit sooner rather than later,” Mr Bloxham said.

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HSBC tips the next rate rise will be mid-2019, while financial market pricing suggests the RBA’s overnight cash rate won’t be increased until about November 2019.

Potential negative impact

Former RBA board member John Edwards said the RBA would want to see what happens to falling house prices and any potential negative impact on household consumption.

“It is under no particular urgency because there is as yet little evidence of accelerating wages growth, or inflation,” Dr Edwards said.

Wages growth in Australia
Wages growth in Australia

RBA

“February or May will also coincide with the election campaign, though I think the board would overlook that if it thought a change was necessary. By mid year if the RBA has not yet commenced the tightening episode, it risks having to do too much too quickly as wages and inflation pick up.”

Former prudential regulator Jeffrey Carmichael, who in July called for the RBA to prepare the market for rate increases, said the central bank had “largely missed the boat” to raise rates.

“With the impact of the royal commission on bank lending, we are already seeing a slowdown in lending and a material correction in housing prices,” Dr Carmichael said.

“Raising rates from here will be more difficult – and having held off raising them in the recent past gives the RBA effectively no room to reduce them if the housing slowdown starts to impact more widely.”

Corporate profit share

RBA governor Philip Lowe has been awaiting an overdue rise in wage growth, as the corporate profit share hovers around record levels compared to the labour share.

“As the labour market tightens, wages growth is likely to drift upwards,” the RBA’s statement on monetary policy said on Friday.

“Some measures of wages growth picked up a touch in the June quarter, and a further boost could occur in the September quarter as the effects of the Fair Work Commission’s minimum wage decision flow through.”

The economy’s annual growth hit a robust 3.4 per cent in the June quarter and the unemployment rate has fallen to a six-year low of 5 per cent. The jobless rate will be updated on Thursday.

Usually, such positive economic conditions would command higher interest rates.

However, HSBC’s Mr Bloxham said weak inflation meant it was appropriate for the RBA to keep the overnight cash rate at a “highly stimulatory” 1.5 per cent.

“The thing that is going to turn this around is wages growth, so this week is more important than usual,” he said.

“Once we have the last piece of the puzzle, the RBA ought to be thinking about normalising its policy settings.”

Treasury’s business liaison program has detected labour shortages in technology and construction.

The RBA is clinging to its record low interest rate setting even after last week upgrading its economic and inflation outlook and tipping the jobless rate to fall to a decade-low of 4.75 per cent.

The central bank forecasts economic growth of 3.5 per cent this year and 3.25 per cent in 2019 and the jobless rate to fall to 4.75 per cent in 2020.

Meanwhile, business conditions drifted lower in October, but remain above historic averages, according to National Australia Bank’s business survey.

Business conditions moderated by two points, to be +12.

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