Crucial new wages data will be key to whether the Reserve Bank of Australia board will hike interest rates again.
Official figures revealing how fast wages increased over the March quarter will be published on Wednesday morning, providing fresh insights into whether pay packets are chasing inflation higher.
If wage rises are limited to levels consistent with annual growth of about 3.8 per cent over the year to June, then RBA meeting minutes published on Tuesday suggested an interest rates reprieve.
But a stronger-than-anticipated result could push central bankers towards another mortgage bill hike, amid warnings about “upside risks” to inflation from rising services prices and jobs growth.
As things stand, notable economists are split on whether the RBA will hike rates again in June, with ANZ on Tuesday predicting another rise, while Commonwealth Bank has called for a pause.
Wages data ‘pivotal’
BIS Oxford’s head of macroeconomic forecasting Sean Langcake expects another rate hike, but said Wednesday’s wages figures will be “incredibly pivotal” in deciding what will be a close call in June.
“It’s the first piece of the puzzle on what this tight labour market is churning out in terms of wage results,” Mr Langcake said.
The RBA wants to see evidence that wages, though rising, are not increasing so fast that they’re likely to derail its plan to cool inflation back to 3 per cent in the next two years.
Current forecasts suggest the RBA doesn’t think that will happen.
In fact, the May meeting minutes suggest the 3.85 per cent cash rate target is enough to deliver on the RBA’s inflation forecasts.
“Members noted that the forecasts presented at the meeting were predicated on a technical assumption for the path of the cash rate that involved one further increase [to 3.85 per cent],” the minutes said.
But for that to happen a few crucial things need to go right, including productivity growth lifting back to pre-pandemic levels, which would allow for wages growth to rise to 4 per cent annually.
“A rise in productivity growth will be needed to ensure consistency of the wages growth forecast with the bank’s inflation target,” the board said.
Mr Langcake said that requires a “pretty good” productivity result in the June-quarter national accounts (due later this year), raising a risk the RBA’s plans could go awry and spark another mortgage bill hike.
“What happens to productivity is the link between the wages and inflation picture,” he said.
“If this wages growth comes not because we’re more productive, but because we’re in this cost push cycle where we’re demanding higher wages, then inflation is going to be worse.”
Experts split on outlook
Commonwealth Bank chief economist Gareth Aird suggested the May meeting minutes point towards a rate pause in June, saying that he doesn’t consider the next meeting to be “live”.
However, an upside surprise in wages growth could change things as the RBA remains very sensitive to the strong labour market and how pay packets will respond.
“Another rate increase would require the economic data, particularly around inflation, GDP, the unemployment rate and wages/unit labour costs, to come in stronger than the RBA’s updated forecasts,” he said.
“Put another way, we do not think the RBA will lift the cash rate again if the economic data prints in line or weaker than their forecasts.”
ANZ Bank head of Australian economics Adam Boyton takes a different view, expecting an interest rates hike in June.
“The minutes of the May RBA board meeting strike us in tone as being on the hawkish side, despite the arguments for and against the May rate hike being described as ‘finely balanced’,” he said.
“We see the risks around our expectation of one final 25 [percentage point] rate hike in August being that the RBA hikes more and/or sooner than we anticipate.
“Easing remains some considerable time off.”
