No rate rises until wages growth picks up: RBA

RBA board minutes make it clear the central bank won’t lift rates until pay packets are growing ‘materially faster’ than recent levels.

Reserve Bank Governor Philip Lowe after the Melbourne Cup day board meeting. (Photo LOUIE DOUVIS)

Australian workers struggling with a dismal pace of wages growth in coming years will at least not face rising rates, after the Reserve Bank’s minutes from its historic Melbourne Cup day meeting made it clear that the central bank won’t tighten policy until pay packets are lifting “materially faster” than recent levels.

The RBA board pulled the trigger on a likely final rate cut from 0.25 per cent to 0.1 per cent and launched a $100bn bond-buying program on November 3 when it “became clearer that unemployment would remain high and inflation subdued for an extended period”, the minutes read.

Wages growth is a key driver of inflation, and the lingering impact of the downturn would leave a legacy of heightened spare capacity in the labour market, which was “expected to result in subdued wages growth and inflation over coming years”.

The minutes noted that the cash rate would not be lifted until inflation is “sustainably” back within the bank’s 2-3 per cent target range.

“For this to occur, wages growth would have to be materially higher than recent levels,” board members heard.

“Given the outlook, the board does not expect to increase the cash rate for at least 3 years,” the minutes read, while noting that the three-year bond rate target would be removed before the cash rate was lifted.

Private sector wages inched 0.1 per cent in the June quarter as the pandemic and associated restrictions triggered wage freezes and lay-offs, bringing the annual pace to an all-time low of 1.7 per cent. The Australian Bureau of Statistics will release the September quarter update on the wage price index tomorrow, but the RBA expects annual wages growth will slump to 1 per cent by mid-2021 and stay below 2 per cent for years.

Despite positive signs of a relatively rapid recovery from the COVID-19 recession – which was acknowledged by governor Philip Lowe in a speech on Monday night – board members concluded that “the recovery was expected to be protracted and uneven”.

Dr Lowe has said lowering the unemployment rate was a “national priority”, and the minutes echoed that sentiment.

The minutes also made clear that the new monetary policy package represented a continuation of the “Team Australia” effort between the central bank and the Morrison government through the health crisis, and that the reopening of the economy gave monetary policy easing more traction.

The RBA board’s decision to launch a $5bn a week quantitative easing program, alongside lowering the cash rate and three-year yield target, would “complement the significant steps taken by the Australian government, including in the recent budget, to support jobs and growth”.

Board members believed that “having the various arms of policy all taking steps in the same direction would deliver a greater impact than the sum of the individual parts”.

“This would be especially so during a period in which the economy is opening up and people are more willing and able to spend,” the minutes read.

Board members “acknowledged the difficulties” of savers and how a quarter of all bank deposits now earned interest of under 0.25 per cent. RBA figures show that this proportion of cash savings with rates approaching zero was 15 per cent a year ago.

“While the effect of monetary easing falls unevenly across the community, in aggregate lower interest rates boost disposable incomes for the household sector, which stimulates spending and supports employment,” the minutes read.