RBA likely relieved by minimum wage decision but rate cuts are no closer

The Reserve Bank is likely relieved that the Fair Work Commission announced a smaller-than-expected wage increase, economists believe.

ACTU secretary Sally McManus and Australian Services Union vice-president SA and NT branch Robert Habel respond to the wages decision. Picture: Dean Martin

The Reserve Bank will have had a small sigh of relief after the Fair Work Commission announced slightly smaller-than expected wage increases in its annual review.

But while it may lessen the risk of a prices-wages spiral that could cause more interest rate increases there are more hurdles to navigate before the RBA can deliver interest rate relief, economists say.

The ASX 200 share index hit a four-day high of 7779 points as government bond yields continued to cool after the commission announced a 3.75 per cent rise in the award and minimum wage from July 1.

The Australian dollar was little changed at about US66.50c.

While above the immediate pre-Covid average increase of 3.3 per cent year on year, the increase was well below the 5.5 per cent average of the past two years and a 4.1 per cent rise in the wage price index in the past year. It was also a touch below economists’ expectations of about 4 per cent.

The commission said it wasn’t appropriate to increase award wages by any amount significantly above the inflation rate, principally because labour productivity was no higher than it was four years ago. But it said the rise was consistent with inflation returning to the 2 to per cent target band in 2025.

The RBA board judged after its latest meeting that it was reasonable to look through short-term variations in inflation to avoid excessive finetuning” as “inflation expectations remained well anchored” and there was a “higher-than-usual level of uncertainty about the economic outlook”.

A benign outcome from the annual minimum wage review removes one risk to the outlook, but the RBA still needs to be confident that inflation is falling sustainably toward the target range.

After disinflation stalled in the March quarter, the central bank may need to see a couple more quarters of lower inflation before getting the confidence it needs – unless unemployment spikes.

CommSec senior economist Ryan Felsman said the wage decision would be welcomed by Reserve Bank policymakers as the minimum wage increase “diffuses the risk of a potential wage-price spiral”.

“While the RBA has forecast annual wages growth of 3.8 per cent by the end of 2024, the outcome supports the view that wage-sensitive services inflation should ease later this year,” Mr Felsman said.

“Money markets see almost no chance of an easing by the RBA this year and even a small risk of another hike because of ‘sticky’ domestic inflation.”

The big four banks expect the RBA to start cutting rates in November.

However, while the chance of another interest rise is considered small, in recent weeks the consensus among market economists has shifted into the March quarter of 2025.

UBS still expects rates to remain “higher for longer”, albeit with less risk of a rise after the annual minimum wage increase came in lower than expected.

“We still expect the first rate cut of 25 basis points will not be until February 2025 and that the RBA will lag easing by other global central banks,” UBS Australia chief economist, George Tharenou said.

Mr Tharenou expected a relatively slow easing cycle of 25 basis points per quarter, to a “terminal” cash rate target of 3.35 per cent by the end of 2025. The cash rate target is currently at 4.35 per cent.

But as well as the fact that the minimum and award wage decision was below his expectation of about 4 per cent, he said the subsidies announced in the federal and state government budgets were even larger than expected, potentially lowering headline inflation faster.

“Previously UBS forecast headline CPI would remain stuck until Q4-24 at a relatively high 3.4 per cent year, but given these surprises, we are taking a closer look at our forecasts for wages and CPI,” he said.

Mr Tharenou foresaw downside risk to his CPI forecasts of about a quarter of a percentage point over the coming year versus his forecasts.

The RBA’s current forecast of 3.8 per cent on year was made before the extra subsidies were announced in budgets, while the federal Treasury’s inflation forecasts imply something closer to 3 per cent.

“It now seems, to see the RBA hike rates again a material upside surprise of Q2-24 CPI would likely be required, and probably also require the labour market to remain surprisingly resilient,” Mr Tharenou said.

Citi senior economist Faraz Syed said the RBA’s year-end wages forecast of 3.8 per cent could imply it was expecting an even higher increase in minimum wages this year.

“Ultimately, the bank will be pleased with today’s moderate increase in minimum wages because it lowers the prospects of a wage-price spiral, and the high bar it set in its WPI forecast is unlikely to be reached,” he said.

“This means the board can continue to suggest that it’s on a narrow path to a soft landing and point to a materially lower increase in award wages compared to last year.”

However, he said wages growth was still elevated given that productivity growth was stagnant.

“It points to a period of sticky wages and inflation outside the RBA’s target band,” Mr Syed said.

“Thus we don’t see any near-term dovish risks either, and maintain that the bank won’t change the cash rate this year.”

Capital Economics head of Asia Pacific Marcel Thieliant said that with a looser labour market putting downward pressure on wage growth among workers not covered by the minimum wage and awards, wage growth could slow faster than the RBA was anticipating.

“The 4.1 per cent rise in the wage price index for the March quarter was below the RBA’s forecast of 4.2 per cent and we now expect wage growth to slow to 3.3 per cent by the December quarter, well below the RBA’s forecast of 3.8 per cent,” he said.

“On its own, that won’t be enough to sustainably return inflation to target as productivity growth will remain soft for a while yet, but with inflation set to cool further, we’re forecasting an even smaller 3.25 per cent minimum wage hike next year … accordingly, the bank’s next move is likely a rate cut though not until early next year.”