Strong wage growth still key to rate rise

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Reserve Bank governor Philip Lowe appears in no rush to lift the cash rate given the uncertainties surrounding the inflation outlook and the risk that other coronavirus variants may emerge and impact the economy.

He still wants wages growth to accelerate from its current low level of 2.2 per cent to ensure inflation holds sustainably within the two to three per cent target.

He does not expect wages to be growing at over three per cent until 2023.

However, he told the National Press Club on Wednesday Australia is closer to full employment and achieving the inflation target then he had earlier anticipated and a rate rise later this year is “plausible”.

He expects the unemployment rate to decline to around 3.75 per cent by the end of this year and be sustained at around this rate during 2023 after falling to a 13-year low of 4.2 per cent in December.

“We have no contemporary evidence about how the labour market and how wages are going to respond to an unemployment rate below four per cent,” Dr Lowe said.

“The last time we were there was more than 50 years ago, so we have no contemporary evidence.”

Still, the RBA has significantly increased its forecast for underlying inflation after it unexpectedly rose to a seven year high of 2.6 per cent in the December quarter

It expects underlying inflation will now hit 3.25 per cent in the coming quarters having previously not expected it to reach 2.5 per cent until the end of 2023.

Commonwealth Securities senior economist Ryan Felsman said CBA Group economists expect annual wages growth to be three per cent and the annual underlying inflation growth rate to be at least 3.5 per cent by mid-2022.

“The pre-conditions for an RBA rate hike are expected be met by the August 2022 board meeting,” Mr Felsman said.

“Our expectation is also that the tightening of policy will take place after the federal election due by May 2022.”

But Dr Lowe said the election isn’t relevant to its decision making.

“What we’re driven by is achieving full employment and inflation consistent with the target,” Dr Lowe said in answer to a question.

Prime Minister Scott Morrison also wants to see the unemployment rate below four per cent in the second half of this year, but his Employment Minister Stuart Robert says it could come sooner.

“It could happen very, very quickly because of the amount of effort we are putting into training Australians,” Mr Robert told ABC radio on Wednesday.

“This is something we are very committed to because it just changes lives. We are seeing a generation of skills coming through that we haven’t seen for a long, long time.”

Shadow treasurer Jim Chalmers said Labor wants the unemployment rate to be as low as possible.

“The labour market is partly the unemployment rate, that matters, but it’s not the whole story,” Dr Chalmers told Triple-M radio.

“There’s issues around job insecurity, wages growth, all of those sorts of things, which are important too. We need to remember that. Wages aren’t really growing in any sustainable way so that people can keep up with these skyrocketing costs of living.”

 

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

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