Wage growth spike not ‘meaningful’ enough to force RBA’s hand

The latest wage price index from the Australian Bureau of Statistics (ABS) has revealed that over the June quarter, wages grew by 60 basis points and by 2.1 per cent year-on-year.  

Over the June quarter, wages grew by 60 basis points in the public sector and by 50 basis points in the private sector, with year-on-year rises of 2.4 per cent and 2.0 per cent, respectively.

ABS chief economist Bruce Hockman noted: “Wage growth in Australia has grown at an annual rate of 2.1 per cent, continuing to stabilise between 2.0 and 2.1 per cent over the past four quarters.

“Annual growth across industries is varied with diverse wage pressure across the labour market.”

In recent monetary policy statements, the Reserve Bank of Australia (RBA) has indicated that an upward trend in wages growth would influence a future determination to increase the cash rate.

However, chief economist at AMP Capital Shane Oliver has noted that there would need to be a “meaningful” pick-up in wages growth before the central bank considers pulling the rate lever.

“While it’s good to see wages growth up from its lows two years ago, we are yet to see a meaningful pick-up,” Mr Oliver said.

“This is a drag for consumer spending and will help keep inflation stuck around the low end of the 2–3 per cent inflation target.

“As result, we [AMP] remain of the view that the RBA won’t start raising interest rates until 2020 at the earliest, and given the housing-related downturn, there is still a significant chance that the next move could turn out to be a rate cut.”

Senior economist at ANZ Felicity Emmett added that wages growth is consistent with the RBA’s forecast, but further “acceleration” is required before the central bank revises its market outlook.

“From the RBA’s perspective, the ongoing gradual improvement in wages growth is consistent with its view that the laws of supply and demand are working,” the senior economist said.

“But a more meaningful acceleration in wages growth will be required before inflation looks to be convincingly heading towards the mid-point of the target band.

“This puts the onus on the jobs market, where further inroads into unemployment and underemployment are necessary preconditions for a more convincing acceleration in wages.”

[Related: Stunted inflation to prolong cash rate inertia: ANZ]