MNI ANALYSIS: Speed of Wage Pickup Remains RBA's Worry

--RBA Inflation Downgrade Mostly Due to CPI Re-weighting

By Sophia Rodrigues

     SYDNEY (MNI) - The speed of increase in wage growth is a key uncertainty

for the Reserve Bank of Australia and the main reason the 1.5% cash rate is

likely to remain unchanged for some time.

     The RBA is already making an assumption that wage growth would be slow to

pick up before seeing some lift over time, but there's a worry that it could

take longer than expected. This would not only affect the inflation forecasts

but also affect the outlook for household income.

     Growth in household income is very important to encourage spending, as high

debt levels have already made households cautious about their spending

decisions. 

     Household consumption is an important component of the RBA's growth

outlook, so any downgrade in consumption would hurt the economy's growth

prospects -- other things being equal. 

     The RBA has been watching wage and price inflation remain subdued in some

advanced economies despite falls in unemployment rates, and is concerned that

this trend might be replicated in Australia as the jobless rate falls further.

     Deputy Governor Guy Debelle pointed to this in a speech on Oct. 26, when he

said that the RBA's forecast is that spare capacity in the labor market will be

gradually reduced in the period ahead. "But, as it is reduced, we will be alert

to the possibility that these developments we see in other labor markets, in

terms of subdued inflation in the face of minimal spare capacity, occur here

too."

     As far as the latest forecasts on the economy are concerned, the RBA has

lowered the forecast for inflation, but it's largely due to the effect of the

re-weighting of the consumer price index basket by the Australian Bureau of

Statistics. The changes are expected to lower inflation by up to 0.35 percentage

point in the next year.

     This downgrade could mean underlying inflation may stay below the 2% to 3%

target band for longer. The forecasts, to be published on Friday, will show

numbers rounded to quarter percentage points, rather than in ranges, exposing it

to greater risk of revealing a figure below the target band.

     But the RBA doesn't think it is significant enough to warrant a change in

its monetary policy stance. 

     Outside of the impact of the re-weighting, there has been little change in

the inflation forecast. Growth forecasts are also little changed, so the overall

narrative on the economy hasn't undergone much change since August.

     But underneath this there have been some shifts. The labor market is much

stronger than the last time the forecasts were drawn in August, and business

investment has picked up, partly due to the effect of the government's

infrastructure spending, which is filling up order books in the private sector.

     Countering this is recent data showing weak household consumption, and

dwelling investment is also slightly weaker than projected before.

     For now, the RBA appears to be comfortable with hold-for-longer monetary

policy while closely watching trends in wage growth and household consumption. 

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

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