MNI ANALYSIS: Wage Price Important, Not RBA Rate Game-Changer

--RBA May Wait for Signs of Wage Pass-Through to Inflation

By Sophia Rodrigues

     SYDNEY (MNI) - An acceleration in wage growth is important for the Reserve

Bank of Australia's monetary policy stance, but it is too soon to see it as a

game-changer for a rate hike because the next hurdle -- a pass-through to

inflation -- is more critical.

     Economists who still hold a rate hike view for May, may thus be overstating

the importance of the data in the near term.

     Following a downward surprise in Q4 consumer price index inflation data,

the market has priced out bets for an RBA cash rate hike, now pricing a

negligible 8% chance of a 25bps hike in May versus a 25% chance prior.

     Four out of 21 economists in an MNI poll expect the RBA to hike in May but

two of them have signalled their preparedness to reassess their call based on

wage price data due Feb 21.

     TD Securities strategist Annette Beacher continues to have May as the base

case for a hike but is "awaiting the second hurdle of wage growth momentum

before reassessing" her stance.

     ANZ economists have two rate hikes forecast for 2018, with the first

expected in May but are watching wage price data closely.

     "The risk is that the RBA goes later than expected, with the Q4 wage data

in late February critical," they wrote in a note.

     Economists at National Australia Bank have two hikes forecast in August and

November but add that they are conditional on three developments, one of which

is an acceleration in wage growth.

     --ACCELERATION DOUBTS

     An acceleration in wage growth itself remains in doubt but even if it

materializes, it can't be a game-changer. It is the pass-through to inflation

that is important for the inflation-targeting RBA to bring a rate hike into its

deliberation.

     Back in November, in the minutes of board meeting, for the first time the

RBA showed how its concerns around wage growth had widened.

     The minutes showed not only is the RBA worried about when 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.

     Since then continued growth in employment has raised optimism that wage

growth might slowly rise as the labor market slack diminishes. 

     But there are many offsetting influences. It is unclear how long it will

take for labor market slack to diminish as improving jobs market continues to

bring more workers into the labor force. There is also a doubt on whether the

full employment rate for Australia is still 5% or fallen below that. One would

not know this until the jobless rate falls towards 5% from the current 5.5%.

     One key headwind is the Q3 Federal Enterprise Bargaining Agreements (EBA)

released in January which showed new agreements lodged had wage increases at

2.4% compared with 2.6% in Q2. 

     --PASS-THROUGH CONCERNS

     Perhaps the most significant headwind is the Q4 CPI data which showed

headline CPI rose just 1.9% y/y, thus staying below the RBA's target band for

three straight quarters, and for 12 times out of last 13. 

     It is no coincidence that weak wage trends have followed the weakness in

headline CPI and reflect the growing importance of inflation in wage bargaining.

     But the RBA's worry doesn't stop here. Sectors like retail continue to face

margin pressures and this might prevent them from passing on higher wage costs

-- if any -- to selling prices. This means the cycle of subdued consumer price

inflation could linger for longer.

     Unless the RBA sees convincing signs of this pass-through, it is unlikely

to consider a rate hike. An on hold for longer monetary policy is likely to

remain its policy stance at least until late-2018.

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

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