Improved wages data could fuel further interest rate hikes

Stronger-than-expected wages data this week could seal the case for at least three further interest rate hikes, a leading economist says.

AMP Capital chief economist Shane Oliver. Picture: Jane Dempster/The Australian

Stronger-than-expected wages data this week could seal the case for at least three further interest rate hikes, a leading economist says, days after the Reserve Bank reinforced its determination to tame soaring inflation.

AMP Capital chief economist Shane Oliver said the December quarter wage price index (WPI) numbers from the Australian ­Bureau of Statistics would be “the next big influence on the RBA’s thinking”.

Dr Oliver said he expected the annual pace of pay increases would lift from 3.1 per cent in ­September to a decade high of 3.5 per cent in December – in line with the consensus view among fellow analysts.

The RBA has stressed they are closely watching labour costs and that their business liaison program suggests wages lifted through the final months of 2022.

But Dr Oliver said there was a clear risk that the WPI – which measures the change in pay for a set basket of jobs, and so does not capture changes in income from promotions or more hours worked – would climb by more than anticipated.

“The interpretation of (RBA governor Philip) Lowe’s recent comments are that there will be at least two more hikes, and if the wages figures come in at the high side, that will swing to at least three more hikes,” he said.

Financial markets are already pricing in a peak in rates at 4.1 per cent – versus 3.6 per cent two weeks ago and before Dr Lowe made it clear in his board meeting statement that the bank was more worried about stubbornly high consumer price growth and that “further increases in interest rates will be needed over the months ahead to ensure that inflation ­returns to target”.

The RBA has forecast wages growth to reach 4.1 per cent by June, before peaking at 4.2 per cent in December – a level that would only just be consistent with achieving the RBA’s 2-3 per cent inflation target over time. Wages growth is forecast to drop back below 4 per cent only in early-2025.

Deloitte Access Economics partner David Rumbens.

Deloitte Access Economics partner David Rumbens said the job losses in January’s labour force report was another sign the labour market was becoming less tight. “We are all looking for turning points” in the economy, Mr Rumbens said. “It now looks like we have probably reached the low point in unemployment and we are now heading up,” he said.

The key jobless measure fell as low as 3.4 per cent in October, and lifted to 3.7 per cent in the first month of 2023, after two straight months of falling employment.

RBA governor Philip Lowe has downplayed the significance of the summer weakness in employment, pointing to even higher than usual volatility in the figures and a large number of Australians who said they were about to start work – pointing to a strong recovery in the February jobs numbers.

But Mr Rumbens said “those couple of months of job losses weren’t fluky”.

“There are still a lot of vacancies, but it’s off its peak, so some of that pressure is coming out of the labour market,” he said.