Wednesday’s wage price index has delivered an inconvenient truth, revealing that while wages have gradually picked up, they still run well below the 3 to 4 per cent rates; the Reserve Bank of Australia (RBA) previously suggested it needed to see before lifting its cash rate.
Having already entered inflation fighting mode, economists expect the RBA to reduce emphasis on the wage price index over the coming months, despite statements to the contrary made by the RBA governor Philip Lowe.
Minutes of the board’s May meeting, published on Tuesday, revealed that while the bank deemed wage information “helpful”, it judged that it did not need to wait for the wage price index before hiking, noting that “the recent evidence on wages growth from the bank’s liaison and business surveys was clear”.
According to HSBC’s assessment, the RBA has turned more hawkish based more on the CPI figures and global central bank tilt than their conviction that wages growth is picking up strongly. This, HSBC’s chief economist Paul Bloxham said, raises further questions about the RBA’s recent style of forward guidance.
“It suggests to us that at least for the next few meetings, the RBA is likely to be in ‘inflation fighting’ mode,” Mr Bloxham said.
At the same time, he explained that if wages growth does not get going sufficiently, a short burst of rate hikes may be followed by a pause for assessment, and also potentially a shift back to a growth focus.
“This is our central case. We see 25-bp hikes in June, July and August, another in November – taking the cash rate to 1.35 per cent, which is well below current market pricing for hikes to 2.80 per cent by end-2022”.
Similarly, Barclays expects the bank to increase the cash rate “relatively aggressively” until it reaches the pre-COVID level of 1.5 per cent.
“We expect this to be reached by Q3, with a 25-bp increase in June, followed by 90 bps of hikes in Q3,” Barclay’s economists Rahul Bajoria and Shreya Sodhani said.
After reaching 1.5 per cent, however, the pair believe that the RBA will wait to assess the macroeconomic data, given the large uncertainty around imported inflation as well as the impact of an aggressive hiking cycle for the first time since since 2010.
“We see the cash rate reaching 1.75 per cent by the end of 2022 and expect the rate to end this cycle at 2.0 per cent by Q1 23”.
Wednesday’s data from the Australian Bureau of Statistics (ABS) revealed that wages added 0.7 per cent during the March quarter.
The lift, which was slightly below market expectations, brought the annual rate of growth to 2.4 per cent, up from 2.3 per cent in the previous quarter.
The ABS said that rises across the private sector were the main driver of growth during the quarter, with an increase of 0.7 per cent quarterly and 2.4 per cent annually.
Meanwhile, public sector wages grew by 0.6 per cent in the March quarter 2022 and 2.2 per cent annually.
