RBA quashes hopes of wage rise, opens door to lower interest rates

The Reserve Bank of Australia (RBA) has quashed hopes of a lift in wages and opened the door to even lower official interest rates, preparing Australian workers for an extended period of stagnant income growth that will stretch to the next election.

Releasing its last update to key forecasts for the year on Friday, the RBA downgraded a raft of predictions around economic growth, wages, housing investment and consumption.

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It believes the economy will expand by 2.25 per cent this year, down from the 2.4 per cent it forecast in August and well short of the 3.3 per cent it predicted in its monetary policy statement in November last year.

The bank last month cut official interest rates to a record low of 0.75 per cent, arguing it wants unemployment down to 4.5 per cent to lift inflation.

But it now thinks wages will grow by only 2.2 per cent through 2019 and will reach a 2.3 per cent rate by the end of 2021. Unemployment is tipped to get down to 4.9 per cent, from 5.2 per cent, over the same period.

"Wages growth is low and shows little sign of picking up," the central bank said in its quarterly monetary policy statement.

Its wages forecasts are now well short of what the Morrison government predicted in the April budget. The RBA is tipping wages to grow a full percentage point slower than Treasury, which will update its forecasts next month.

The slow lift in wages is contributing to soft household consumption, which is now expected to grow 1.4 per cent this year. Retail sales are growing at their slowest rate since the 1990-91 recession – with demand for furniture, cars, utilities and recreational goods all slipping sharply over the past year.

The bank noted jobs growth remains strong – particularly in the household services area, which has added almost 1 million positions since 2011, and in healthcare, which is up by almost 600,000 roles over the same period.

The export sector, particularly mining, is doing better – with exports tipped to grow 5.2 per cent. Dwelling investment, though falling sharply this year, is tipped to rebound by 2021 on the back of lower interest rates.

The RBA has come under fire for taking the official cash rate to 0.75 per cent through three rate cuts since June. It has also started to consider "unconventional" monetary policies to boost the economy.

In its statement, the bank admitted the lower interest rates fell, the less broad impact they had, but revealed that might be its next step to drive down unemployment.

"The [bank] board was mindful that rates were already very low and that each further cut brings closer the point at which other policy options might come into play," it said.

Westpac chief economist Bill Evans, who this week called on the federal government to pull forward its 2022-23 tax cuts to boost the economy, said the RBA's forecasts and the language in its monetary policy statement clearly left another interest rate cut on the agenda.

"The downbeat view on wages, inflation and the unemployment rate make it clear that the RBA does not believe that its job is done and so we can expect further policy action from the RBA in 2020," he said. "Westpac continues to expect the RBA to cut to 0.5 per cent in February 2020 and to move to unconventional policies at an appropriate time."

Commonwealth Bank chief executive Matt Comyn, giving evidence to a parliamentary committee on Friday, said recent cuts in interest rates had lifted the housing sector.

But he said with retail still struggling there was scope for the federal government to lift the economy.

"Further rate cuts from here I don't think would seek to serve a pick-up in economic activity that we would otherwise be looking for," he said. "I can see some merit in bringing forward those tax cuts."