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MNI INSIGHT: Weak Wages Raise Odds RBA Extends Yield Guidance

Sluggish wages growth is dampening RBA hopes of higher inflation, MNI understands.

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Sluggish wage growth is making it more likely the Reserve Bank of Australia could extend the period during which it indicates interest rates are likely to remain unchanged at its July meeting, by targeting a bond maturing in November 2024 under its yield-curve-control programme, MNI understands.

While unemployment fell to a pre-Covid level 5.1% in May, public sector wages growth slid to an annual 1.5%, the lowest in three decades. Even a 2.5% rise in the minimum wage last week is unlikely to change the RBA's view that Australia is a long way from seeing wage increases which drive inflation, currently at 1.1%, into the 2% to 3% target range, thus creating conditions for a rise in the cash rate from 0.1%, something which the Bank says is unlikely until 2024 "at the earliest".

If the RBA judges rates as likely to remain unchanged at the end of 2024 then next month it will probably extend its yield control target of 0.10% to three-year government bonds maturing in November 2024, from current guidance targeting April 2024.


The RBA's baseline forecast from the May Statement on Monetary Policy was for inflation to reach 2% by June 2023, with an upside forecast of 2.25%. But the wages data since then has dampened inflation hopes, MNI understands.

The RBA has received some help from the surprisingly hawkish tone set by the Federal Reserve at its meeting on Wednesday, which knocked the Australian dollar back to the mid 0.75-cent range from above 0.77. But Australia's central bank is more concerned by its own weak inflation outlook.

Also in July the RBA will decide on its future quantitative easing activities, with its current AUD100 billion programme due to end in September. The RBA has indicated QE will continue, but is more focused on the quantity of bonds it will ultimately hold, and the percentage that this represents of outstanding government debt, than on the pace or size of the next programme.

The RBA is expected to hold around AUD220 billion or 25% of total government debt by August. In comparison, the Reserve Bank of New Zealand is already over 40% with a self-imposed ceiling of 60%.