Mortgage holders to pay for big boost to aged care wages

A more stimulatory federal budget and the big boost to aged care worker wages could delay interest rate relief for mortgage holders, a leading economist says, ahead of the RBA’s decision on Tuesday.

Reserve Bank governor Michele Bullock remains concerned that cost pressures on services businesses will hold inflation higher for longer. Picture: Jane Dempster

A more stimulatory federal budget and the big boost to aged-care worker wages could delay interest rate relief for struggling mortgage holders, a leading economist says, ahead of the Reserve Bank’s latest decision on Tuesday.

Aged Care Minister Anika Wells on Sunday played down warnings that pay increases of as much as 13.5 per cent for 350,000 aged-care workers – and up to 7 per cent for another 100,000 workers – would complicate the RBA’s battle to bring inflation back under control.

“We don’t have inflationary problems in this country because our lowest-paid workers are being paid too much,” Ms Wells told Sky News. “We are in an inflationary cycle and there is uncertainty across the globe.”

With interest rates firmly on hold, the RBA board has so far been unwilling to follow the lead of global counterparts and signal plans to cut rates in 2024, despite the pace of inflation nearly halving through 2023 to 4.1 per cent, based on the quarterly figures.

But AMP chief economist Shane Oliver said the Fair Work Commission’s latest decision – after last year’s 15 per cent pay rise for aged-care workers – likely came as “a shock” to the RBA.

While the roughly 450,000 affected workers involved directly and indirectly in aged care represented only 3 per cent of employed Australians, Dr Oliver said the size of the pay increases could add 0.3 percentage points to aggregate wage growth. Adding the risk of a more stimulatory May budget, he said, and the pay decision could further delay rate cuts from an RBA board still lacking confidence that inflation will return to the midpoint of its 2-3 per cent target range by June 2026.

“As an industry, aged care is ultimately a part of hospitality and services more generally. That does run the risk of a flow-on to other wages at some point, which could keep them (the RBA) cautious for longer.

“We were thinking they were going to cut in June, but I must say the risks now point to later than that, probably in August, and the aged-care decision adds to that.”

Judo Bank economic adviser Warren Hogan said the latest aged-care wage decision in isolation “is not that big a deal”.

“But these outcomes are all going one way, and the RBA would be well advised not to drop the tightening bias,” Mr Hogan said, referring to the board’s messaging that it was still prepared to hike rates again.

Jim Chalmers has said there will be no “cash splash” on May 14, as the Treasurer looks to secure a second straight surplus despite billions in spending announcements this year in areas such as remote housing in the Northern Territory and superannuation on taxpayer-funded parental leave.

He has, however, flagged the budget approach would shift from a “sole focus” on winning the fight against inflation to supporting weak economic growth.

Investors are pricing in a rate cut by September, with a 60 per cent chance of a second by the close of the year. The central bank’s economists forecast inflation will only retreat below the top of the 2-3 per cent range by late next year, before falling towards 2.5 per cent in the first half of 2026.

Capital Economics economist Abhijit Surya said the RBA’s reluctance to point to rate cuts this year was based on “concerns that the last mile in the fight against inflation could be the hardest”.

With the firm consensus Tuesday’s board decision will be for the cash rate to stay at 4.35 per cent for a further six weeks, analysts will scrutinise the accompanying board statement for any change in its “mildly hawkish” outlook.

Citi chief economist Josh Williamson said he expected the statement to again note “it will be some time yet before inflation is sustainably in the target range”, followed by the key phrase “a further increase in interest rates cannot be ruled out”.