Australians should get ready for another interest rate hike in June, after economists predicted the growth in wages in the March quarter will prompt the Reserve Bank to act.
The Australian Bureau of Statistics (ABS) on Wednesday revealed wages grew 3.7 per cent annually – the fastest rate since September 2012 – amid a strong jobs market.
Quarterly growth remained steady at 0.8 per cent, though public sector pay rose slightly.
There’s an “upside risk” in wage growth over the next six months, Indeed APAC economist Callam Pickering said.
“[Wage growth] could be pushing 4 per cent over the next six months,” Mr Pickering said.
“Another rate hike in the near term is highly probable.”
The RBA stated on Tuesday that higher-than-expected wage growth in 2023 could derail its plan to reduce inflation, if productivity doesn’t lift.
While wage rises have been consistent with falling inflation and haven’t sparked the cost-of-living crisis, the concern is that inflation may fall too slowly if pay packets rise too fast in 2023.
Purchasing power falls
That’s cold comfort for millions of Australian families suffering under rapidly rising utility bills and rents, with real wage growth falling by a staggering 3.2 per cent over the past year.
Mr Pickering said household purchasing power is now 7.2 per cent lower than its peak, which has effectively erased a decade of “hard won” wage gains.
“The purchasing power of Australian wages has gone backwards at a remarkable pace,” he said. “Inflation adjusted wages are now at their lowest level in 11 years.”
With the RBA expecting wage growth to reach 3.8 per cent in the June quarter, the Wage Price Index (WPI) will need to plateau from here or risk running ahead of their latest forecasts.
That’s important because RBA meeting minutes on Tuesday suggested that reducing inflation back to target by mid-2025 without further rate hikes requires steady, not rapid, wage rises.
Wednesday’s figures were interpreted as broadly in line with the RBA’s expectations by experts, though with some industries recording growth near 4 per cent there are risks that this may change.
KPMG economist Michael Malakellis said central bankers will now be waiting for evidence that productivity growth is improving, which will be key to ensuring rising wages aren’t inflationary.
“There remains a high possibility that WPI will continue to rise above the RBA’s forecast in the second half of the year,” he said.
But Commonwealth Bank senior economist Belinda Allen said there are signs wage growth is starting to plateau, with quarterly growth steady as weaker figures fall out of the annual data.
As covered previously, the bank doesn’t expect the RBA to raise rates again in June.
“We do expect the labour market to show further signs of loosening from here due to the large lift in supply of labour, and as the economy slows,” Ms Allen said.
Productivity key
BIS Oxford Economics Australia head of macroeconomic forecasting Sean Langcake said productivity growth will be the next piece of the puzzle to influence RBA rate thinking.
That’s because RBA minutes on Tuesday suggested the RBA was fearful that rising wages would be inflationary in 2023-24 unless productivity growth returned to pre-pandemic levels.
Mr Langcake, who expects a June rate hike, agreed the RBA would be flying blind to an extent because it’s difficult to measure productivity growth over the short term.
“They’re saying wages growth is pretty hot and that we’d need something to happen [stronger productivity growth] that hasn’t really been happening for quite a while to make this OK for the inflation outlook,” he said.
Mr Pickering agreed that a reliance on stronger productivity growth was a key question mark in the RBA’s interest rates and inflation guidance.
“I wouldn’t want the viability of my forecasts to be relying on robust productivity growth,” he said.
