RBA Emphasizes Need for Higher Wages Growth in Subtle Shift

The Reserve Bank of Australia highlighted the importance of stronger wages growth before considering any rise in interest rates, providing itself with a little extra room by emphasizing a traditionally lagging indicator.

“It was likely that wages growth would need to be sustainably above 3%,” the RBA said in minutes of its March policy meeting in Sydney Tuesday, noting overseas experience suggested Australia would need a tight labor market and considerable time for this to occur. “Wages growth would be unlikely to be consistent with the inflation target earlier than 2024.”

RBA Emphasizes Need for Higher Wages Growth in Subtle Shift

The stress on wages is in line with a regular refrain from Governor Philip Lowe, who maintains that faster pay gains are the key factor in returning inflation to the bank’s 2-3% target. He signaled bemusement at recent global bond market volatility due to concerns over inflation given Australia’s struggles to lift prices in recent years.

“The share of firms in the bank’s liaison program with wage freezes in place had remained high, and most firms had continued to report limited upward pressure on wages,” the RBA said. “Public sector wages growth over the year to December was the lowest on record, and was unlikely to pick up noticeably given the caps on wages growth in place.”

The board said there are likely to be price shifts due to changes in the balance of supply and demand during the pandemic, and it would “look through these transitory fluctuations,” the minutes showed.

The Australia dollar edged lower on release of the minutes, but is now trading little changed at 77.52 U.S. cents at 12:49 p.m. in Sydney. Australian government bonds rallied, outperforming their developed-market peers, ahead of the release.

“There is a legacy of labor market underperformance from the last cycle that should see the RBA lag other developed market central banks in normalizing policy,” said Ben Jarman, a senior economist at JPMorgan Chase & Co. in Sydney. “This high degree of difficulty in achieving wage growth stands behind the 3Y YCC commitment and guidance that conditions to hike are unlikely to be met until 2024 at the earliest.”

Australia’s economy has experienced a V-shaped recovery as authorities managed to bring Covid-19 under control and unemployment has fallen accordingly: to 6.4% in January from a pandemic peak of 7.5%.

Yet, the central bank stepped up its bond buying, including an unscheduled operation, as it battled rising yields fueled by the reflation trade sweeping global markets earlier this month. The RBA defended its 0.10% yield target -- also the level of the cash rate -- and sought to soothe markets.

The bank said today members discussed the three-year yield target and reiterated it would need to consider “later in the year” whether to shift to the November 2024 bond.

“If the board were to maintain the April 2024 bond as the target bond, rather than move to the next bond, the maturity of the target would gradually decline until the bond finally matured in April 2024,” it said. The bank reiterated that it would give “close attention” to the flow of economic data and the outlook for inflation and jobs when considering the issue.

The board also discussed financial stability issues given asset prices -- particularly property -- are rising in response to record-low interest rates.

Data today showed house prices advanced 3% in the final three months of last year from the prior quarter and 3.6% from a year earlier, exceeding estimates.

“Members noted that lending standards remained sound and that it was important they remain so,” the minutes said. “The board concluded there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets.”

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