Australia central bank sees inertia in home-grown wages, inflation

Sydney

AUSTRALIA'S central bank board still thinks it likely a rise in interest rates will not be needed until 2024 given inertia in home-grown wages and inflation, even as financial markets price a move as early as next June.

Minutes of the Reserve Bank of Australia's (RBA) November policy meeting released on Tuesday (Nov 16) showed the bank's board did acknowledge the risks on inflation had shift upward after a surprisingly strong reading on third-quarter consumer prices.

Core inflation picked up to 2.1 per cent and moved back into the RBA's 2-3 per cent target band for the first time in 6 years, a development the bank had not expected until 2023.

"The central scenario for the economy continued to be consistent with the cash rate remaining at its current level until 2024," the minutes showed. "However, as the risks to the inflation forecast had shifted higher, it had become possible that an earlier increase in the cash rate would be appropriate."

As a result, while the bank kept the cash rate at a record low of 0.1 per cent, it abandoned a target for 2024 bond yields concluding it was no longer credible. Markets had already moved to price in a rate rise to 0.25 per cent by June next year, largely reflecting inflation spikes globally and particularly the United States. Yet the board still saw reasons to expect wages and inflation in Australia to lag the global trend.

Official data on wages for the third quarter are due on Wednesday (Nov 17) and are forecast to show a pick-up in annual growth to 2.2 per cent, back to roughly where it was before the pandemic. Lowe has long argued that to keep inflation in the 2-3 per cent band, wages need to expand at 3 per cent or more, a pace not seen since 2013. Indeed, in recent years not a single industry or sector has recorded pay rises above 3 per cent.

The pandemic may have changed that for a period, with the closure of Australia's international borders leading firms to complain of a lack of suitable labour and talk of big pay offers in some sectors. But with borders due to reopen soon, the government has been talking of expanding migration once again with students and farm hands first on the list. REUTERS