Below target wage growth not enough to sway RBA

The Australian Bureau of Statistics’ (ABS) latest Wage Price Index (WPI) has reported wage growth of 0.5 per cent over the quarter ending 31 March 2019 and 2.3 per cent in annual terms.

The quarterly result fell below market expectations of 0.6 per cent growth, following on from below target inflation results and continued weakness in the housing market.

However, according to senior economist at ANZ Research Catherine Birch, the subdued wage growth data would not provide the Reserve Bank of Australia (RBA) with further clarity as to the overall trend in the domestic economy, given conflicting trends between public and private sector wage growth.

“It was a tale of two sectors,” Ms Birch said. “The public sector recorded its slowest quarterly growth in 19 years (0.4 per cent), while the private sector saw the strongest annual growth in four years (2.3 per cent).”

She added: “The mixed results do not provide a clear signal to the RBA.”

However, following the RBA’s latest monetary policy board meeting, in which it held the cash rate at 1.5 per cent, the central bank downgraded its forecasts for GDP and inflation growth.

According to AMP’s chief economist, Shane Oliver, the downgrade signalled a significant shift in the RBA’s outlook, with the statement reflecting an “implicit easing bias”.  

“It would be wrong to interpret this month’s inaction as a sign that rate cuts are not on the way,” he said.

Mr Oliver added: “[The] RBA has effectively lowered its hurdle for a rate cut to be the absence of a further decline in unemployment, from being a rise in unemployment.”

Mr Oliver added that he believes the RBA was deterred from cutting the cash rate by the current political environment with the federal election approaching, and he expects the RBA to pull its cash rate lever in June.  

“The basic problem for the RBA remains that inflation has been undershooting its forecasts and the 2-3 per cent target for around five years now,” he said.

“The longer this persists, the more it will lose credibility, seeing low inflation expectations become entrenched and risking a slide into deflation in the next economic downturn.”

[Related: RBA at risk of ‘losing credibility’]