Wage demands could push up rates - RBA

THE RBA has warned that workers who demand more pay to meet their rising living costs could spark further rate rises.

Wage demands could push up rates - RBA

THE Reserve Bank has warned that workers who demand more pay to meet their rising living costs could spark further rate rises over the coming months.

The RBA today announced it would leave the cash rate unchanged at 7.25 per cent, despite inflation sitting well outside its target band of 2-3 per cent growth.

The Australian reported today that efforts to get inflation under control could be stymied by workers demanding pay rises to cope with high prices for petrol and food.

If incomes rise it will dull the effects of recent rate rises and could prompt the RBA to look at another hike.

Inflation woes

One of the central bank’s key tasks is to keep inflation – or the rate of price rises – under control. Growth much higher than 3 per cent indicates the economy is growing too quickly, while lower than 2 per cent means it’s getting too sluggish. By raising rates the RBA takes money out of homeowners’ pockets giving them less to spend, and slowing demand for consumer goods. Cutting rates has the opposite effect – freeing up more money and boosting spending.

Stop spending

ANZ Bank chief economist Saul Eslake told AAP the RBA seemed willing to put up with higher inflation as long as domestic demand slowed and wages didn’t blow out.

“The clear message is what will trigger any further tightening in monetary policy is evidence that undermines their confidence that domestic demand is slowing as required,'' he said.

RBA governor Glenn Stevens said consumer demand needs to slow significantly this year if inflation is going to start falling. He said evidence was growing that this was happening as household spending drops and people seek fewer credit cards and loans.

Earlier rate rises by the RBA, coupled with independent home loan hikes by Australia’s big banks, has put the squeeze on household spending – higher housing costs leaves less to spend in other areas.

“Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that (inflation) outlook would need to be reviewed,” Mr Stevens said.