MNI INSIGHT: RBA Comfortable With Stronger Wages Growth

The Reserve Bank of Australia is comfortable with wages growth exceeding the rate of inflation and sees this as a return to normal conditions and unlikely to drive higher prices and create more pressure for interest rate hikes, MNI understands.

Australia is the midst of a hard fought election campaign and wage levels, which have consistently lagged inflation, are a key issue with the Labor opposition advocating a rise in the minimum wage to match CPI inflation, which is currently at a decade high of 5.1%.

Wages growth had been a main theme for the RBA in its earlier dovish outlook as it responded to the pandemic, and strong evidence of wages growth through the liaison programme was a key reason the central bank hiked rates 25bps to 0.35% this month, See: MNI STATE OF PLAY: RBA Could Take Rates To 2.5%, Says Lowe.

DATA AHEAD

MNI understands the RBA is unlikely to be surprised when the Australian Bureau of Statistics publishes the wage price index for the first quarter of this year, and believes information from the liaison programme is more current. The index was at 2.3% for the fourth quarter of 2021.

The RBA’s current forecasts, as published in this month’s Statement on Monetary Policy, show wages rising at 3.5% by December 2023 and higher than both CPI and underlying inflation at 3.1, just outside of the RBA’s 2% to 3% target band.

MNI understands the RBA sees wages growth at around 3% and inflation at 2.5% in the longer term, in an environment which it believes will allow it to maintain low interest rates by historical standards.

INTEREST RATE TRACK, HOUSING

RBA Governor Philip Lowe last week said he expected official rates to be around 1.5% by the end of this year and rise to 2.5% over time.

On house prices, which have started to fall after rising around 20% last year, MNI understands the RBA remains sanguine about the economic fallout despite warning that prices could drop by up to 15% over the next two years.

The RBA does not see the possibility of widespread mortgage defaults undermining financial stability, particularly as wages rise, and believes most households have built up cash buffers or are ahead of their mortgages after saving money during the pandemic.

The Australian Prudential Regulatory Authority increased the buffer for banks to use when assessing mortgages to 3% last October, and the RBA has confidence that this will provide some rate hike insulation for most recent mortgages.