RBA for tighter labour markets, faster wage growth

SYDNEY: Australia's central bank believes it will take a significant and sustained tightening in the labour market to lift inflation to more comfortable levels, a tough task that could take years to achieve.

Minutes of the Reserve Bank of Australia's (RBA) February policy meeting released on Tuesday showed the Board recognised that wage growth had been too subdued for years before the pandemic imposed its own restraints on pay.

Firms had responded to the global uncertainty by delaying wage hikes or freezing wages, and the bank's liaison suggested it would be some time before such freezes ended. Government had also responded by limiting public sector pay raises, a trend that could take some time to reverse given rapidly rising borrowing loads.

"A sustained period of labour market tightness would be needed to generate the faster wage growth required to see inflation return to the 2 to 3% target range," the Board agreed.

The RBA's own forecast is that underlying inflation will not even reach 2% by the middle of 2023, a major reason it does not expect to start raising interest rates until 2024 at the earliest.

Rates were slashed to a record low of 0.1% last year as part of a major monetary and fiscal stimulus plan that saw the economy revive much quicker than first feared.

House prices have swung sharply higher across the country and home construction is booming, helping push unemployment down to 6.6% in December from a peak of 7.5%.