More rate rises loom as RBA’s Michele Bullock says wages growth is ‘on the high side’

Reserve Bank governor Michele Bullock has flagged concerns with the recent acceleration in wages growth, saying it was not sustainable without a lift in productivity.

Jim Chalmers with RBA governor Michele Bullock at the ASIC annual forum in Melbourne on Tuesday. Picture: Aaron Francis

Reserve Bank governor Michele Bullock has flagged concerns with the recent acceleration in wages growth, saying it was not sustainable without a lift in productivity as Jim Chalmers warned that the global economy was on track for a “substantial” loss of momentum over the coming two years.

The comments come as minutes from the RBA’s Melbourne Cup Day meeting confirmed that the RBA was prepared to hike again in coming months if incoming data on the economy and inflation was in hotter than expected, even as board members recognised the “painful squeeze” on household finances after 13 rate hikes in 18 months, amid soaring cost of essentials such as food, energy and rents.

The minutes said the Hamas terrorist attacks on October and the Israeli assault on Gaza “had increased uncertainty about the global economic outlook”, and that the Middle East conflict was “an upside risk for global inflation if it were to lead to a disruption in energy supply from the region”.

Speaking at ASIC’s annual conference in Melbourne on Tuesday, Ms Bullock said that subduing inflation was “the crucial challenge” facing the Australian economy over the coming one to two years.

The Albanese government has celebrated the lift in pay rates to a 14-year high in the year to September, amid the tightest labour market in nearly 50 years.

Ms Bullock said wages growth of 4 per cent would normally be consistent with achieving the 2-3 per cent inflation target over time but “we haven’t had any productivity growth in Australia for a number of years”.

“If we don’t have any productivity growth, they [wages growth] are on the high side and they’re going to contribute to rises in costs,” she said.

With unemployment still hovering at near 50-year lows, Innes Willox, chief executive of national employer association Ai Group, said Ms Bullock’s comments “are stark reminders of the risks to the inflation outlook and further interest rate rises from strong nominal wage increases at a time when productivity is going backwards”.

Appearing immediately before Ms Bullock on Tuesday, the Treasurer said the expectation among international policymakers was that “the next couple of years of growth (would) be the weakest in the last two decades outside of the two big shocks, the GFC and the pandemic”.

Dr Chalmers also highlighted that economies had proved relatively resilient to the surge in interest rates around the world as ­central banks raced to tame the largest inflationary outbreak in a generation.

“Among all of the countries that we compare ourselves with, we are in a better position than most, if not all, of those countries,” he said.

“Confidence at a consumer level is relatively low but we have a very resilient labour market (and) business investment has been ­really quite remarkably strong.”

With the price of Australia’s key export, iron ore, pushing back above $US130/tonne in recent days, Dr Chalmers said “we have other advantages as well, particularly when it comes to what we sell the world (and) the prices that we’re getting”.

In weighing up whether to hold for a fifth straight meeting on Nov­ember 7 or return to lifting rates, RBA board in the minutes highlighted a surprising resilience in the Australian economy, as members “noted that the risk of not achieving the board’s inflation target by the end of 2025 had increased and it was appropriate that monetary policy should be adjusted to mitigate this”.

Despite the “painful squeeze” on some households’ finances, board members voted in favour of a rate rise to 4.35 per cent, and “observed that delaying such an adjustment would create a risk that a larger monetary policy response might be required in coming months, especially if inflation pressures turned out to be stronger than expected”.

The RBA is “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”, but another hike was not assured.

“Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame would depend on how the incoming data alter the economic outlook and the evolving assessment of risks”.

Most economists believe that any further rate rise would most likely come at the RBA board’s first meeting for 2024 in February, by which time the central bank will have the December quarterly consumer price report.

Financial markets are pricing in a less than 5 per cent chance of an increase in the cash rate to 4.6 per cent in December, lifting to over 30 per cent by February, according to NAB.

CBA senior economist Belinda Allen said while the RBA was likely done with raising rates, “what is clear from recent communication is that the board is likely to have very little tolerance for an upside surprise” on inflation.

Ms Bullock in her remarks also pushed back against criticisms that hitting struggling households with higher interest rates was not the right tool to bring down a range of prices that were outside the RBA’s ability to affect.

“There’s a bit of a perception that inflation is all a supply (issue) – things like petrol prices, rents, energy, these sorts of things,” Ms Bullock said. “There’s an under­lying demand component to it as well, and that’s what the central banks are trying to get on top of.”

The minutes confirmed this view, with members at the Nov­ember 7 meeting discussing that “high inflation was being underpinned by above-average price rises for a wide range of consumer goods and services”.