REPEAT: MNI ANALYSIS: RBA Reinforces Wage Expectations Mgmt

Repeats Story Initially Transmitted at 07:04 GMT Dec 5/02:04 EST Dec 5

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia turned up the dial Tuesday in

its new strategy to manage wage expectations.  

     Despite a slightly more optimistic outlook on growth in its cash rate

statement, the RBA's main concern remains centered around the speed and extent

of a pickup in wage growth.  

     Two weeks ago Governor Philip Lowe admitted for the first time that one of

his strategies has been to manage wage expectations. 

     "To the extent that we have a strategy here, my strategy has been to talk

about the benefits of stronger wage growth, to put a floor under wage

expectations," Lowe said at the Q&A session following a speech on November 21.

     In its cash rate statement, the RBA reinforced this strategy by referring

to "reports that some employers are finding it more difficult to hire workers

with the necessary skills."

     The comment is aimed at raising expectations about wage growth because

shortages of skilled workers in the past have resulted in an acceleration in

wages. So far, this hasn't happened in the current cycle but the RBA is hopeful

that it will eventually occur.

     At the same time, there remains uncertainty as to how long this will take

to materialize and how fast the wage pickup will be. To that extent, managing

expectations would seem to be a helpful strategy.

     The speed and extent of wage growth is very critical to the RBA's monetary

policy stance, not only because it is important for the inflation and growth

outlook, but also because it bears on the future welfare of the Australian

people, the preservation of which is an important part of the central bank's

mandate. 

     A faster rise in wage growth would lead to a faster increase in household

income and bring down the high household debt-to-income ratio.

     Worries about wage growth have increased recently because the RBA has

realized that not only is a faster pickup needed but also higher wages need to

be successfully transmitted to higher inflation. There are now doubts that the

transmission will follow the pattern seen in the past.

     In its November Statement on Monetary Policy the RBA expressed this concern

when it said that "important uncertainties influencing the outlook for inflation

include the questions of how much wage growth might pick up as the labor market

tightens, and how quickly the resulting increase in labor costs might feed into

inflation."

     The RBA is aware that to deliver inflation around the 2.5% mark -- the

middle point of its target range -- requires a year-on-year wage growth rate

starting with "3."  It would like workers to start believing that is a

possibility and that a wage growth rate starting with a "1" that was seen in the

recent past is not the norm.

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