Australia’s wages growth is slowing with labour supply more abundant than expected: RBA
The central bank says wages growth is slowing, with labour supply more abundant than anticipated, as it becomes more optimistic a rate cut could be on the horizon.
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The Reserve Bank is increasingly optimistic that the risk inflation fails to fall to its target level has diminished in recent months.
And coupled with a sharper than expected decline in wages growth that could pave the way for mortgage relief to millions of households across Australia.
Minutes from the board’s policy meeting earlier this month, released on Tuesday, show that the central bank suggested a sharper slowdown in wages growth could signal that potential labour supply was more abundant than had been assumed.
They noted that it was possible for wages growth to slow even when employment was above its full employment level, so long as the labour market was moving towards better balance and inflation expectations remained anchored.
The RBA also discussed the possibility that the slowing was in response to earlier weakness in productivity growth, noting that growth in unit labour costs had also declined from its previously rapid rate, according to the minutes.
It comes as Australia’s population has surged in the past two years amid record levels of immigration with data showing that the country was now home to 27.2 million people following 445,600 foreign arrivals in the 12 months to June. Analysis from Mastercard suggested that without record immigration then the country’s unemployment rate could be closer to 2 per cent currently.
Governor Michele Bullock has pointed to the ongoing strength of the jobs market as one of reasons that the RBA has been unable to cut interest rates.
Fresh data released by the Australian Bureau of Statistics last week showed a surprise drop in the unemployment rate to 3.9 per cent last month.
Following the release of job figures, which showed employment increased by 35,600 in November, bond traders trimmed their rate cut bets, delaying a quarter-point rate cut to the central bank’s May board meeting.
The seasonally adjusted Wage Price Index rose 0.8 per cent in the September quarter and 3.5 per cent over the year compared to 4.1 per cent in the June quarter.
The step-down in growth was most pronounced for those whose wages were set by awards and enterprise bargaining agreements, which the board said reflected the smaller increases in award wages this year and the absence of one-off administered wage increases. Public sector wages were slightly softer than expected in November.
The RBA said that while members judged the upside risks to inflation to have diminished, it was too soon to conclude with full confidence that inflation was moving sustainably towards target. Members were cautious of resilience in the economy with indications continued strength in consumer demand and stubborn services inflation.
Interest rates were kept on hold at 4.35 per cent in December for the 13th consecutive month in what was viewed as a dovish tilt after the release of fresh GDP figures showing the economy expanded by 0.8 per cent in the year to September, the weakest non-pandemic result since the early 1990s recession.
Members judged that the risk that inflation returns to target more slowly than forecast had diminished since the previous meeting and that the downside risks to activity had strengthened.
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A consideration underpinning this judgement was reduced momentum in GDP growth.
The minutes added that consumption growth had been weaker than expected over this period and that it was not clear whether the apparent strengthening in consumer spending in October and November would be sustained.
The RBA noted that employment growth had been driven by the non-market sector (government) over preceding quarters and that there was a risk that job creation could stall if growth in government jobs were to slow more markedly than currently anticipated.
JPMorgan chief economist Ben Jarman said the minutes suggest a cut is coming into frame as the board gave “careful consideration” to the softer news on inflation, wages, GDP, and consumption, while opting to leave the cash rate steady.
“The latter qualifier has been used before to hint a move is coming, conditional on verification in the next round of Statement of Monetary Policy forecasts (July 2016), and the board explicitly observed that ‘important additional information … along with a revised set of staff forecasts, would be available by the February meeting’,” he said.
Goldman Sachs chief economist Andrew Boak said the minutes also removed prior language noting the board wanted to see “more than one good quarterly inflation outcome” and instead highlighted weaker-than-expected outcomes across consumption, wages growth and housing-related inflation.The RBA said if the future flow of data continued to evolve in line with, or weaker than, their expectations, it would further increase their confidence that inflation was declining sustainably towards target.
“If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness,” the minutes said.
If the data came in stronger, that process could take longer, but the RBA said decisions would be guided by how evolving data shaped the economic outlook and associated risks.
Originally published as Australia’s wages growth is slowing with labour supply more abundant than expected: RBA
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