Reserve Bank Statement on Monetary Policy says jobless rate to fall further, fuelling wages growth

Bumper levels of job vacancies ahead in the December quarter will fuel more wage growth, the Reserve Bank’s latest economic assessment says.

The unemployment rate will head even lower in the December quarter amid bumper levels of job vacancies, fuelling more wage growth, the Reserve Bank’s latest economic assessment says.

The RBA on Friday cut its jobless rate forecast to 3.25 per cent for the December quarter, from the 3.75 per cent it expected in May, its quarterly Statement on Monetary Policy said.

That comes as the July unemployment rate – at 3.5 per cent – is already at near 50-year lows and as labour force participation has surged to the highest levels in 112 years.

The RBA expects an increase in the average hours worked across the economy, and for wage growth to accelerate to 3.5 per cent by mid-2023 and 3.75 by the end of 2024, the fastest pace since 2012.

“An increase in average hours worked, which remain below their pre-pandemic trend, is also expected to be a key margin of adjustment in response to strong labour demand,” the statement said. It cited its engagement with businesses that suggested about 60 per cent expected higher wages growth in the year ahead.

Treasury has higher expectations for wage growth expecting an increase of 3.75 per cent in 2022-23 and an unemployment rate of 3.75 per cent.

While upbeat on the jobs market, the RBA does expect house prices to decline and spending by households to moderate as official rate hikes temper demand.

The RBA also warned that risks for the global economy were “skewed to the downside”. Picture: AAP Image/Brendan Esposito

“Growth in consumption is forecast to slow as rising prices and higher net interest payments weigh on real disposable income growth, and declines in housing prices lower net household wealth,” the statement said. “The household saving ratio is expected to decline over the forecast period to just below its average level in the years prior to the pandemic.”

The quarterly statement forecasts housing investment will turn negative in the year ended December 31.

The RBA also warned that risks for the global economy were “skewed to the downside”, as price and energy market and supply chain pressures continued to weigh on growth. The central bank forecasts the Australian economy will expand 3.25 per cent this year before slowing to 1.75 per cents in 2023 and 2024.

“The slowing in growth is expected to be driven by an easing in household consumption growth,” the RBA said on Friday. It also cautioned that domestic retail gas and electricity prices were expected to climb 10 per cent to 15 per cent over the latter half of 2022.

The RBA this week raised rates by half a percentage point to 1.85 per cent, adding a further $140 to the monthly interest bill on a $500,000 mortgage once passed on to borrowers.

Dr Lowe on Tuesday said while the tight job market would lower unemployment in the short-term, slower economic growth would then see the jobless rate rise.

The bank’s central forecast is for the unemployment rate to be 3.5 by June 30 next year and 4 per cent by the end of 2024. The 3.25 per cent forecast is based on an average for the December quarter.

Consumer price growth hit 6.1 per cent over the year to June 30, only equalled in the past three decades following the introduction of the goods and services tax in 2001.

The RBA’s economists on Tuesday forecast inflation reaching 7.75 per cent this year – in line with Treasury’s recently updated predictions.

On Friday, the RBA reiterated it was focused on returning inflation to its targeted band. 

“The board is committed to do what is necessary to ensure that inflation in Australia returns to the 2 to 3 per cent target range over time. It is seeking to do this in a way that keeps the economy on an even keel,” the central bank said. “The path to achieve this balance is a narrow one and subject to considerable uncertainty.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.”

The quarterly statement also said inflationary pressures had “broadened significantly” since late 2021, as price pressures expanded throughout the economy across products and services.

The RBA noted that market pricing implied the cash rate was expected to reach about 3 per cent by December.