RBA rates call puts doubt on wage rises
The Reserve Bank has cast doubt on prospects for a pick-up in wages, suggesting globalisation and technological change are undermining the link between falling unemployment and wage growth.
In its quarterly economic statement, released yesterday, the bank indicated it had little inclination to lift official interest rates so long as wage growth and inflation remained low.
“Rates will stay on hold until both wages growth and core inflation are on a sustained upward trend. And that still looks to be some way off,” said Commonwealth Bank economist Gareth Aird. “The governor all but confirmed that rate hikes are not happening in the near term in his optimistic yet dovish speech earlier this week.”
According to prices in financial markets yesterday, there was a 32 per cent chance of one increase in interest rates by October this year, down from about 60 per cent a month ago.
The central bank acknowledged the series of sharp falls in global equity and bond prices over the past week, but kept its twin forecasts for inflation and economic growth unchanged from the last formal update in November. It expects economic growth to rise to 3.25 per cent next year, while inflation rises slowly to 2.5 per cent, back to the middle of the target range.
“The experience of low wage growth in those countries with tighter labour markets suggests that structural factors, such as technological change and globalisation, have also had an important bearing on wage outcomes and could continue to do so for some time yet,” the statement on monetary policy said. “There is considerable uncertainty about whether the future demand for labour will be met by people entering the labour market, by people currently unemployed or by employed people working more hours.”
Despite record jobs growth last year of more than 400,000, mainly full-time, positions, the latest measures suggest wages are rising at an annual rate of less than 2 per cent, little different from the official inflation rate, which was 1.9 per cent by the end of last year.
“There was plenty of downbeat commentary on wages,” JPMorgan chief economist Sally Auld said.
TD Securities chief strategist Annette Beacher observed: “The labour market and wages growth got a lot of airtime — ‘wage’ was mentioned 76 times in the document.”
“There have been broadbased declines in wage growth outcomes for the majority of workers who have remained with the same employer in recent years,” the statement said.
Earlier this week, RBA governor Philip Lowe said more volatility in equity markets could not be ruled out. “Many investors had been working under the assumptions that unusually low inflation and unusually low volatility in asset prices would persist, even with above-trend growth at a time of low unemployment,” Dr Lowe said.
Scott Morrison yesterday said the governor’s speech had been “very measured”.
“I think his comments should have significantly reassured Australian investors,” he said.