In line with market forecasts the Australia wage price index has just been released. For the three months ended September, matching the 0.6 percent rise from the previous quarter, the Wage Price Index rose 0.6 percent.
Especially at a time when many expect Australian home prices will continue to edge lower, if the Reserve Bank of Australia’s ambitious forecasts a slightly faster pickup in underlying inflationary pressures, for lower unemployment and faster GDP growth to be achieved in the years ahead it will almost certainly need wage growth to rise.
The broader outlook for wage growth whether it’s to support household spending inflation or GDP growth will be the key. Carrying the potential to generate volatility in Australian financial markets, for the September quarter Australian Wage Price Index will be a blockbuster data release.
Australian wage growth has been terrible in recent years as explained by TD Securities Global Rates, FX and Commodities Strategy team, helping to explain why the RBA’s cash rate remains stuck at its current record low of 1.5%, especially compared to periods in the past.
It says, ‘between the December quarter 2016 low of 1.87% and the June 2018 quarter report of 2.14%, the pace of annual wages growth has barely increased.’ Before 2014 a 5% unemployment rate used to generate annual wage growth closer to 3.5-4%.
In order to offset weakness in the housing market and an increase in borrowing costs, the RBA will need to see household income growth improve before it can lift official interest rates. However, many economists and financial markets in whole cant see that RBA lifting its cash rate until 2020.
TD says, ‘the main trigger for higher cash rates for some time now as seen by the markets is 3% annual wages growth, in a rate hike for the second half of 2019 to make the markets seriously price they need to see this report posting annual wages growth closer to 2.5%.
Although not everyone agrees with Bloomberg forecasting a quarterly increase of 0.5% or less some believe last year the result in the September quarter was influenced by one-off factors.
The increase in Australia’s minimum wage rate on July 1 which lifted the base hourly rate by 3.5 percent will have impact on the data, no one is sure of what there will be, particularly in 2017 a similarly-sized increase in 2017 didn’t translate to a big lift in broader wage growth.
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