McCrann: RBA cautious on next move, wages the key

Wage increases for wharfies and construction workers have left the RBA feeling cautious about its next move as the threat of inflation lingers.

RBA governor Michele Bullock fronts a press conference on Tuesday. Picture: NCA NewsWire / Dylan Coker

The lady is not – quite yet – for turning.

Not only did the Reserve Bank keep its policy interest rate unchanged, but governor Michele Bullock left open whether the next move – if and when we did get a move – would be another hike or the first post-Covid cut.

This puts the RBA out there on its own.

The Fed, most obviously and most - globally – importantly has pivoted from talking in December about possible future rate hikes to, now, talking possible future rate cuts.

The Bank of England and the ECB, slightly less emphatically, have switched this year to talking about how long they keep their present rates on hold, before, by implication, moving to rate cuts.

Yes, our cross-Tasman cousin, the RBNZ is still officially on the record, talking possible future rate hikes.

But that was at the end of November; the RBNZ only has its first meeting back for the new year at the end of this month. I suggest it will pivot.

Only end-February?

Amusingly, and entirely incidentally, our neighbour is not only the land of the long white cloud, but the long – even longer than us – dozy summer, it would seem.

I can understand Bullock’s ambivalence, even if she didn’t really spell it out in either the policy statement, the detailed quarterly analysis of the economy, or at her foundational media conference.

Yes, the RBA’s forecasts, properly interpreted, have a pretty clear interest rate projection. There’s zero chance of another rate hike, and the RBA’s official policy rate will be cut some time this year.

But the invisible elephant in the room is what might happen to wages, and indeed is actually

happening right now, to blow what are essentially good-news forecasts right out of the analytical water.

Two elephants, to be more specific actually.

They are the 25 per cent, over four years, wage increases agreed with the DP World wharfies - half our waterside workers - and the similar 25 per cent wage deal with the CFMEU, and thus, indirectly, all workers in construction.

Let me spell it out, as Bullock would as well: if 6 per cent-a-year wage increases became generalised and entrenched across the economy, it would be absolutely incompatible with keeping inflation even at 4-5 per cent, far less getting it down and then keeping it down below 3 per cent.

Obviously waterside costs feed into the cost of just about everything, but especially goods (mostly imported from China); and low goods inflation has been the big plus in recent date.

In the same way, increased building and construction costs feed right and quickly across the

economy.

In those circumstances, Bullock and her board would have no option other than to go back to rate hikes and I mean hikes, plural. Even if unemployment was rising.

That’s the worst case, the horror scenario; both for her and for everyone.

Yes, as I’ve argued, I don’t think she should have hiked in November; and as a theoretical exercise, argued she should have reversed on Tuesday.

But that absolutely does not deny the possibility of, or an obligation for, rate hikes.

It’s all about wages.

Originally published as McCrann: RBA cautious on next move, wages the key