Those hoping the Reserve Bank might cut Australian workers a bit of slack in its battle to curb inflation will be disappointed by the central bank’s latest economic report.
The release of the RBA’s quarterly statement on monetary policy on Friday does help us understand the thinking behind Tuesday’s decision to raise interest rates for a ninth meeting in a row and why further increases are likely in coming months.
The standout numbers were the higher projections for underlying inflation. The so-called trimmed mean gauge – which strips out more volatile movements – is what the RBA wants to see brought back within its target 2%-3% range over time.
Here are RBA's updated forecasts for the economy and inflation, as per its quarterly statement on monetary policy. pic.twitter.com/bJm6MgTbHj
— @phannam@mastodon.green (@p_hannam) February 10, 2023
The December quarter’s 6.9% reading popped higher than projected, and will only be pegged back to 6.25% by June and 4.25% by this December, the RBA now says. It will take another year to return to 3% – hence the bank’s intent to hike its cash rate several more times, come what may.
Several factors were behind the higher inflation projections for 2023, including a faster pickup in wages than expected.
Back in the September quarter, the wage price index rose 1% for the quarter and 3.1% annually.
True, the quarterly pace was the fastest since the March quarter of 2012. However, compared with consumer prices rising at 7.3% for the period, real wages went backwards at a record clip of 4%-plus.
We finally get the December quarter WPI on 22 February, and everyone expects some acceleration. The RBA forecasts it will reach 4.25% by the end of 2023 (CPI will be higher at 4.75%) before easing to 3.75% by mid-2025.
The RBA is forecasting real wages will continue to retreat, with increases not keeping up with inflation. However, the payments of bonuses and other incentives suggest workers' compensation might not be going backwards as fast as the WPI implies, the central bank says. pic.twitter.com/iCOur88oz0
— @phannam@mastodon.green (@p_hannam) February 10, 2023
“The near term outlook is higher than a few months ago, reflecting the stronger-than-expected September quarter WPI outcome and ongoing strength in timely indicators of wages growth,” the RBA said.
Lest the unions keep crying foul about real wages’ slide, the RBA hopes angst will be soothed by increases in the “broader measures of labour income growth”, such as bonus payments, promotions and working more overtime hours that pay better.
Taken together, such compensation is “expected to increase at a faster rate than the WPI”, the RBA hopes.
The central bank’s main worry seems to be workers might exploit the tight labour market to demand more dough. Employers will then pass that on to prices, and a wage-price spiral will take off.
Should that happen, “[stronger] feedback between wages and prices would result in persistently higher inflation throughout the forecast period, which could lead to inflation expectations becoming de-anchored”, the statement said.
Another point of notes is that “at least half” of the inflationary pressures in Australia are the result of supply shocks such as Russia’s invasion of Ukraine, the Covid pandemic disrupting activity and “poor weather”.
That doesn’t get us off the hook, though, because “substantial policy support” (ie handouts) contributed to demand for many goods and services exceeding supply.
The RBA is also closely monitoring how households cope with higher debt repayments – including the looming spike when about a third of mortgage holders switch from fixed rates of 2% or so to 5% or more as terms expire.
“Scheduled mortgage payments are projected to reach between 9.5% and 9.75% of household disposable income by the end of 2023, based on cash rate increases to date,” it said. Given what’s coming, make that 10% or more.
As bad as that sounds, households used the Covid years to funnel $120bn into mortgage offset and redraw accounts – or 7.75% of annual household income.
“Higher income borrowers hold a greater share of these buffers, but lower income borrowers in aggregate continued to contribute to their offset or redraw accounts over 2022,” it said, implying the buffer is not limited to the better-off.
One other point noted by John Hawkins, a former senior economist at both the RBA and Treasury and now lecturing at the University of Canberra, is the conclusion that “there is no evidence that the overall potency of monetary policy is any stronger in Australia than elsewhere”.
That piqued Hawkins’ curiosity. Australia’s relatively high household debt and the fact that a much higher proportion of mortgages are at variable rates than is the case elsewhere should make monetary policy more potent here.
“If the RBA has got this wrong, there is a risk that the cash rate may go too high,” he says.
