Australia's Hiring Surge Emboldens Central Bank on Wages Growth

(Bloomberg) -- Australia’s booming jobs market emboldened the central bank to scrap a long-held reference to weak wages, even as it signaled concern about a housing slump in an unchanged interest-rate decision.

Governor Philip Lowe removed a line that “wages growth remains low” from his statement Tuesday, instead saying that the recent pickup in pay gains was a “welcome development.” The Reserve Bank chief and his board left the cash rate at 1.5 percent, as they have since August 2016.

The governor was decidedly upbeat on jobs after unemployment fell to 5 percent, the lowest level in more than six years, with data Wednesday forecast to show the economy expanded an annual 3.3 percent last quarter.

“With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely,” he said. “The improvement in the economy should see some further lift in wages growth over time.”

Australia's Hiring Surge Emboldens Central Bank on Wages Growth

Lowe was more cautious on Sydney and Melbourne housing, observing that credit conditions for some borrowers “are tighter than they have been for some time, with some lenders having a reduced appetite to lend.” He said demand for mortgages by investors “has slowed noticeably.”

The deteriorating housing market introduces a new variable to the RBA’s policy matrix as it threatens household sentiment and spending. Lowe has been using record-low rates to drive faster economic growth and tighten the labor market to force employers to offer workers higher wages; that in turn will boost incomes and inflation and lay the ground for the first rate rise since 2010.

Australian house prices recorded their biggest monthly drop since the global financial crisis in November, reflecting lending curbs and buyers staying on the sidelines. Sydney is now down 9.5 percent from the July 2017 peak.

Australia's Hiring Surge Emboldens Central Bank on Wages Growth

What Our Economists Say...

The RBA “remains in no rush to tighten monetary policy. Even so, it welcomed the recent pickup in wage growth, which ultimately brings the day of a rate hike a bit closer.”

-- Tamara Mast Henderson, Bloomberg Economics

For more, see our Australia Insight

Other Insights:

  • On the impact of the U.S.-China trade tensions, Lowe said: “The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions.”
  • The RBA chief kept his commentary on the currency pretty much unchanged. The Aussie has recovered some ground in the past three weeks, but is still down around 9 percent from its late January peak

As to the outlook for the cash rate, traders are pricing in less than a 50 percent chance of a hike by the end of next year. Among economists, only 10 of 25 surveyed by Bloomberg expect a tightening next year.

The RBA will next convene in February.

©2018 Bloomberg L.P.