MNI POLICY: RBA Caution As Wages Growth Higher Than It Seems
MNI (MELBOURNE) - Australian labour costs are growing faster than headline wage price data suggests, a factor which in combination with weak productivity growth is likely to make the Reserve Bank of Australia reluctant to ease further in the near-to-mid term, MNI understands.
While Q4 inflation data surprised to the downside, prompting February’s 25-basis-point cash rate cut to 4.10%, and subsequent Wage Price Index data has also exhibited growth softening, broader measures of the labour market suggest continued tightness. (See MNI RBA WATCH: Board Delivers Hawkish 25BP Cut)
The National Account’s this month showed average earnings per employee, which also include bonuses and public sector compensation claims, rose 1.1% over Q4, 40bp higher than the WPI over the same period. The RBA’s qualitative business surveys also note that over 80% of employers have encountered hiring difficulty, constraining their output.
While the Board decided to remove some of the cash rate’s restrictiveness in February, continued imbalances within the labour market will make it cautious about further moves.
Governor Michele Bullock has warned the market should not expect further easing anytime soon, however, traders have priced in a 64% chance of a 25bp cut at the May meeting and a 3.4% rate by December, which would result in underlying inflation above the Bank's 2.5% midpoint target, according to the RBA's scenarios. (See MNI INTERVIEW: RBA More Reactive In Future - Former Economist)
While February's Statement of Monetary Policy (SOMP) made a greater effort to detail the Reserve’s view on its neutral rate estimate, the RBA does not give it much weight and prefers to look at the performance of inflation, GDP and the labour market to judge the restrictiveness of the cash rate.
ALTERNATIVE SCENARIOS
RBA officials for the first time presented the Board with two alternative scenarios at the February meeting: one in which underlying CPI undershot the 2.5% midpoint target if the cash rate held at 4.35% for two years, and another featuring multiple 25bp cuts over the same timeframe.
The RBA has developed its scenario expertise recently and will continue to present more detailed and varied models to the Board over time and share them publicly following decisions, either within future SOMPs or via presentations delivered by senior staff.
Since early 2024, the Reserve has included a cash rate assumption derived from market pricing, which has confused the public and commentators, as this does not reflect where the RBA sees future monetary policy. The scenarios are meant to demystify the Reserve’s thinking and make its reaction function more transparent.