MNI ANALYSIS: Lack of Wage Passthrough to Infla New RBA Worry

By Sophia Rodrigues

     SYDNEY (MNI) - There is no denying that pickup in wage growth remains a key

concern for the Reserve Bank of Australia but the minutes of the November board

meeting showed why this worry has increased further.

     Not only is the RBA worried about when and and the extent to which wage

growth might pick up but it is also concerned about how much of any pickup might

fail to be passed through to inflationary pressure if margin pressures from

strong competition remain and productivity growth picks up faster than expected.

     How this pans out will be key to the RBA's monetary policy stance in the

period ahead as this new addition to the list of uncertainties could mean

inflation may remain subdued for longer than the RBA forecasts, and thus may

force a cut in the cash rate at some point.

     The minutes of the November board meeting published Tuesday showed how wage

growth remains key to the RBA's inflation and growth forecasts.

     The RBA said wage growth had remained low and was expected to increase

gradually over the forecast period as spare capacity in the labor market

diminishes and the dampening effects of compositional changes associated with

the economy's rebalancing abate.

     But "there was considerable uncertainty around when and how quickly wage

pressures might emerge and about how much these would add to inflationary

pressure," the RBA minutes said.

     "In particular, they noted that, among other factors pressure on margins

from strong competition and a faster-than-expected pick-up in productivity

growth could delay the pass-through of tighter labor market conditions to

inflationary pressure," the RBA said.

     The outlook for inflation is highly dependent on the persistence of

heightened competitive pressures, the outlook for wage growth, and the speed

with which wage costs might flow through to higher prices.

     The RBA is already expecting competitive pressures on both retail margins

and costs to continue for quite some time. In the minutes, the RBA also

discussed the possibility that globalization and technology were leading wage

growth to be less responsive to changes in the demand for labor, which would

continue for a while.

     As far as the labor market is concerned, the RBA expects the unemployment

rate will decline gradually on the back of continued employment growth.

     But it is uncertain how rapidly the unemployment rate might decline because

the forecast is based on the assumption that the labor market participation rate

would remain around current levels, the RBA said.

     The RBA's forecast for growth was largely unchanged from three months ago,

with upside risks from public and non-mining business investment. The RBA's

assumption is that consumption would growth at around the average pace seen

since the financial crisis, so any disappointment on wage growth would pose a

downside risk to consumption growth.

     The latest data on wages were published after the November 7 board meeting

and showed wage growth remained subdued despite the impact of a rise in minimum

wages during the quarter. These data would only increase the RBA's concern.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]