The Reserve Bank of Australia is coming under increasing scrutiny, with reports revealing Treasurer Jim Chalmers is close to finalising an independent review into the bank.
Much of the criticism is over the central bank's forward guidance during the pandemic that interest rates were not expected to rise until at least 2024.
What did the RBA do?
The pandemic and the economic crisis that came with it brought about a recession and record-low wage growth.
Part of the Reserve Bank's policy response was to cut already-low interest rates to record lows.
Then, on May 3, 2022, the bank decided to raise the cash rate for the first time in over a decade.
But it is not clear how the RBA concluded that there was "stronger upward pressure" on wages growth occurring.
In a rare press conference following the decision to raise interest rates, RBA governor Phillip Lowe said the bank had been waiting for evidence of higher wages growth to justify — in part — a decision to raise rates.
"This focus on trends in labour costs was evident in the board's communication after the previous meeting when we stated that over coming months we would be assessing important additional evidence on both inflation and the evolution of labour costs," Mr Lowe said.
What is the RBA's 'liaison program'?
The bank obtains evidence of wage growth from its in-house liaison program as well as through well-established business surveys.
The liaison program involves 70 meetings a month, on average, between the RBA and businesses — the majority being individual firms varying in size from large to small.
In April, there were 63 meetings under the formal liaison program.
Most of these meetings were with individual entities, but some included more.
The RBA says one of the meetings in April had 15 firms present.
"While the various data compiled by the ABS (Australian Bureau of Statistics) have not yet been released, other evidence received over the past month through our business liaison and our business surveys has indicated that there is now strong upwards pressure now on labour costs and that this is likely to continue," Mr Lowe said.
But Rae Dufty-Jones, an economist and associate professor at the University of Western Sydney, said it was not appropriate for the Reserve Bank to use that data alone as evidence of larger wage increases.
"It's not a representative sample," Dr Dufty-Jones told The Drum.
In other words, the data could be used to provide context or further insight into a more statistically based trend that was observed from statistically valid sources of data.
"But that in itself should not inform monetary policy," she said.
"It doesn't provide you with an overall picture of all businesses and where they sit in terms of wages."
Former chief economist of the ANZ Bank, Saul Eslake, agreed with Dr Dufty-Jones.
"Sixty businesses hardly constitutes a statistically reliable survey," he said.
The Financial Review's economics editor, John Kehoe, told The Drum: "I imagine that they'd be speaking to people like Woolworths and Coles, and some of the other big employers as well were sort of telling [the Reserve Bank], 'Our wages bill is about to go up from about 3 per cent.' Some were saying it might even get to 4 per cent. But it's a difficult balancing act."
"Even that, total employment is many millions of people, so it's very small sample size," Mr Eslake said in response to Kehoe's comments.
"I think the RBA had dug itself into a hole whereby it needed evidence that wages growth was starting to accelerate in order to satisfy its precondition for starting to raise rates, that underlying inflation was sustainably within the 2 to 3 per cent target range."
RBA says decision to lift interest rates based on 'accumulation of evidence'
In a statement to the Drum, the RBA said: "The Board's decision in May was in response to the accumulation of evidence over several months through various types of liaison; it was not based on a single month's worth of meetings."
But the bank admitted that "contacts are asked how much they were raising wages by" and they "don't ask for documentary evidence of actual wages paid".
The RBA also relies on established business surveys, which include measures of wage growth.
But on examination of the surveys used, it is questionable whether their results — which informed the bank's decision to raise interest rates in May — show any evidence of strong wage growth.
The RBA refers to the Australian Industry Group's business survey, which contains a "wages index".
But it measures the number of businesses lifting wages — not the size of those pay increases.
The RBA also refers to the National Australia Bank's business survey, which shows growth in labour costs, but that is simply because many more Australians are in employment.
Two weeks after the first rate rise in May, the Australian Bureau of Statistics also released its closely watched Wage Price Index.
But that showed relatively low wage growth of just 0.7 per cent over the three months to December, and then again from January to March.
While the Fair Work Commission's decision last week to raise the minimum wage is certainly a welcome shift, the Reserve Bank's decision to lift the cash rate target means households with an average mortgage of $5,000 per month will be paying hundreds of extra dollars in monthly mortgage payments.
The central bank faces a federal government review.
The Treasurer is yet to announce the details.
