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MNI ANALYSIS: RBA Stmt Reinforces Wage Expectations Management

By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia turned up the dial Tuesday in
its new strategy to manage wage expectations.  
     Despite a slightly more optimistic outlook on growth in its cash rate
statement, the RBA's main concern remains centered around the speed and extent
of a pickup in wage growth.  
     Two weeks ago Governor Philip Lowe admitted for the first time that one of
his strategies has been to manage wage expectations. 
     "To the extent that we have a strategy here, my strategy has been to talk
about the benefits of stronger wage growth, to put a floor under wage
expectations," Lowe said at the Q&A session following a speech on November 21.
     In its cash rate statement, the RBA reinforced this strategy by referring
to "reports that some employers are finding it more difficult to hire workers
with the necessary skills."
     The comment is aimed at raising expectations about wage growth because
shortages of skilled workers in the past have resulted in an acceleration in
wages. So far, this hasn't happened in the current cycle but the RBA is hopeful
that it will eventually occur.
     At the same time, there remains uncertainty as to how long this will take
to materialize and how fast the wage pickup will be. To that extent, managing
expectations would seem to be a helpful strategy.
     The speed and extent of wage growth is very critical to the RBA's monetary
policy stance, not only because it is important for the inflation and growth
outlook, but also because it bears on the future welfare of the Australian
people, the preservation of which is an important part of the central bank's
mandate. 
     A faster rise in wage growth would lead to a faster increase in household
income and bring down the high household debt-to-income ratio.
     Worries about wage growth have increased recently because the RBA has
realized that not only is a faster pickup needed but also higher wages need to
be successfully transmitted to higher inflation. There are now doubts that the
transmission will follow the pattern seen in the past.
     In its November Statement on Monetary Policy the RBA expressed this concern
when it said that "important uncertainties influencing the outlook for inflation
include the questions of how much wage growth might pick up as the labor market
tightens, and how quickly the resulting increase in labor costs might feed into
inflation."
     The RBA is aware that to deliver inflation around the 2.5% mark -- the
middle point of its target range -- requires a year-on-year wage growth rate
starting with "3."  It would like workers to start believing that is a
possibility and that a wage growth rate starting with a "1" that was seen in the
recent past is not the norm.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]

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