MNI ANALYSIS: Wages, Inflation Key in Shaping RBA Outlook

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is more confident about growth

and employment prospects for the economy, but it is the pace of wage growth and

how it feeds into overall inflation that will guide the outlook for monetary

policy.

     The minutes of the December board meeting, published Tuesday, suggest that

the RBA's monetary policy will remain on hold for longer but with risks

remaining on the downside.

     The RBA's described the household consumption outlook as a "significant

risk" and noted that "household balance sheets still warranted careful

monitoring."

     The need to monitor household balance sheets remains because wage growth

remains subdued -- in the September-quarter data, the increase was slightly

below the RBA's expectation. Because wage growth remains subdued, household

balance sheets have not improved despite slowing in credit growth.

     For the RBA's monetary policy, it is important that wage growth picks up

pace, thus improving household income and capacity to spend. The RBA also is

unsure how increases in wage growth would translate into overall inflation. The

RBA discussed this in the November minutes, where it said that "there was

considerable uncertainty around when and how quickly wage pressures might emerge

and about how much these would add to inflationary pressure."

     "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 in November.

     Because of these two main concerns, stronger prospects for economic growth

and employment appear to matter less for monetary policy.

     "Recent data had increased confidence that there would be further progress

on these (unemployment rate and inflation) fronts over the following year," the

RBA said in its December minutes. But it added: "How far and when stronger

conditions in the economy and labor market might feed through into higher wage

growth and inflation remained important considerations shaping the outlook."

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

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