SYDNEY: Wages data backed Reserve Bank of Australia (RBA) governor Philip Lowe’s dovish price views as markets continue to bet he will be forced to raise interest rates in as little as six months.
Lowe said wages need to rise 3% or more to return inflation to target as annual pay gains matched estimates at just 2.2% last quarter.
The RBA argued it will take about two more years of ultra-low rates to tighten the job market enough to drive decent pay gains. That contrasts with market pricing for the possibility of a first hike from the current 0.1% as early as May.
Traders see the benchmark rising three times in 2022 as Australia’s high vaccination rate positions it to ride an economic rebound, with the nation under the same inflation pressures as economies from Washington to Wellington.
Yet economists including Catherine Birch at Australia & New Zealand Banking Group Ltd (ANZ) noted a key difference with places like the US is the lack of churn in jobs – where workers jump between employers in pursuit of higher pay.
“It’s too early to see wage prints in Australia as strong as those in New Zealand, let alone the US,” Birch, a senior economist at ANZ, said before the release. “And we haven’t yet seen the ‘Great Resignation’ here to put upward pressure on wages.”
There are also some specifically Australian factors that weigh on wage growth.
Many salaries are set based on long-term contracts that have a ceiling of 2.5% or lower; and public-sector workers, which constitute roughly 16% of total employment and have often sent a price signal to the wider economy, facing caps on gains or outright pay freezes.
Australia’s unemployment rate surged to 5.2% in October as a protracted lockdown on the east coast took its toll. But with restrictions lifting and forward indicators showing activity reviving, the job market is expected to recover swiftly.
Lowe reckoned the jobless rate needs to fall to 4% or lower, and stay there for some time before employers will be prepared to pay more to attract staff.
The governor cited the pre-pandemic experience of New South Wales, where the state jobless rate fell to around 4% and wages didn’t do much. More recently, Western Australia shut its domestic border during Covid and saw labour shortages as unemployment hit 3.9%. Yet again, pay gains remained weak.
Still, consumer inflation expectations were 4.6% in November, up from 3.3% in August, and monetary and fiscal authorities are still pumping stimulus into Australia’s A$2 trillion (US$1.5 trillion or RM6.26 trillion) economy. ― Bloomberg