RBA Frets Over Wage Growth, Signaling Rates to Remain on Hold

(Bloomberg) -- Australia’s central bank signaled less confidence in the outlook for fatter pay packets, despite faster full-time hiring, suggesting interest rates may remain lower for longer, in minutes of its November board meeting.

Main Takeaways

• There was “considerable uncertainty” around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure
• More positively, forward indicators “suggested there were more upside risks” to the non-mining investment forecast than there had been for some time
• The labor market’s recovery since late 2016 “had been stronger than expected,” including in the mining powerhouses of Queensland and Western Australia, suggesting the adjustment to the downturn in resource investment “was nearing completion
• The Australian dollar fell to 75.43 U.S. cents at 12:20 p.m. in Sydney, compared with 75.58 cents before the report

State of Play

The minutes suggest the Reserve Bank of Australia is increasingly concerned the local labor market is headed for a similar malaise to that gripping the U.S., U.K., Germany and Japan, where low unemployment isn’t translating into wage gains. The difference is that Australians are also heavily indebted -- after 26 years without a recession -- raising a risk to the outlook for consumption that accounts for half of gross domestic product. The upshot: rates are likely to remain at a record-low 1.5 percent for some time yet.

Key Quotes

• “Members noted that the outlook for inflation would be influenced by the persistence of heightened competitive pressures, the outlook for wage growth and the speed with which wage costs might flow through to higher prices. They observed that competitive pressures had led food and other retailers to alter their business models in an effort to reduce their cost structures”
• “Members observed that, in most advanced economies, growth in wages and hourly earnings had been low despite ongoing reductions in spare capacity. They discussed the possibility that globalization and technology were leading wage growth to be less responsive to changes in the demand for labor, which could continue for a while”
• The RBA reiterated the central forecast was for GDP growth to pickup to average around 3 percent over the next few years: “Although the staff expected GDP growth to rise, the forecast suggested that productivity growth would be relatively subdued in the near term”

Economist Takeaways

• “RBA minutes spent more time on downside facts than upside forecasts,” said Stephen Koukoulas at Market Economics in a tweet. “A crack in the facade appears.”
• “The minutes highlighted the growing uncertainty around the RBA’s view that wage growth would “increase gradually” and that “inflation was expected to increase”,” said Paul Dales at Capital Economics. “The comment that “although unemployment rates had continued to fall, wage growth had been slow to increase in many economies and core inflation had remained low” shows that the RBA is starting to learn from the experience overseas.”

The Backdrop

The Reserve Bank of Australia has kept rates unchanged for 15 months as it aims to support business investment and household spending, while using macroprudential measures to cool home- lending and the property market. Australia is starting to lag the rest of the world when it comes to economic growth and stimulus withdrawal, though unemployment has fallen to a four- year low of 5.4 percent.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Victoria Batchelor

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