Low wage growth – A big cause of worry for Australia’s interest rate scenario!


Reserve Bank of Australia seems to have raised its hands when it comes to interest rate hike looking at the sluggish wage growth. The intend is to deliver a boost to households to take off the mounting debt burden. Since August 2016, the cash rate has been maintained at 1.5 per cent and this has been defined as the most sustained period of the policy inaction since the early 1990s when the bank first introduced its 2-3 per cent inflation target.

While the central bank expects a gradual move towards the rise in inflation in relation to the improving outlook for global and domestic economy, jobless rate has again seen a downside and reached to 5.5 per cent at the back of low cost of the money. This has kept inflation from falling further below the bottom of the target band. Growth in consumption also puts forth some level of risk if household income growth were to increase by less than expected. What is alarming is that despite an improvement in labour market conditions, wages growth has remained subdued. Growth in the wage price Index in September Quarter was at lower side as expected and wage growth outcomes associated with the new enterprise agreements had been lower than the percentage increase that was incorporated in the agreements which they were replacing. On the other hand, with strengthening demand for labour, wage growth might increase by more than the anticipated levels.


Wage Growth across Industries (Source: Australian Bureau of Statistics)

According to the Australian Bureau of Statistics, wage price index in the December Quarter witnessed wages rising just by 0.5 per cent from the previous three months and by 2 per cent from a year earlier which is materially below the wage growth rate that is 3.5 per cent as forecasted by the Reserve Bank. Market already expected a quarterly gain of 0.5 per cent based on the steady rate on yearly basis that is 2 per cent. The wage growth increased by 2.4 per cent over the year after a seasonal adjustment for public sector and there was a growth of 1.9 per cent in wage growth of private sector. From a quarterly perspective, public sector wages grew by 0.6 per cent on seasonally adjusted basis and up by 0.5 per cent for private sector.

Overall, an improvement in wage growth seems to be happening at a lower than expected pace and this can take few years to get back to 3 per cent level. This, however, does reflect a weak inflation rate and makes it difficult for RBA to justify higher interest rates. Uncertainty that looms around household consumption can take some time to get settled while business conditions along with public infrastructure spending have been supporting the economy.


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