AUS
NZ
UK
CA
USA
IND
Source: Number1411 ,Shutterstock
Summary
- RBA governor Philip Lowe attributed “materially” lower wage growth as an obstacle to the inflation rate meeting the expected target.
- The current wage growth of 1.4% is a major roadblock to achieving the desired inflation target, which requires a wage growth of 3%.
- The RBA estimates that even with favourable economic conditions and faster recovery, the inflation and wage growth target may not be achieved before 2024.
Even as Australian economy continues to inch ahead with multifaceted recovery in progress, RBA Governor Philip Lowe hinted at wage growth being too slow for monetary policy tightening to be followed. The combination of a strong monetary policy and a complementary fiscal policy has enabled the Australian economy to get on track towards recovery.
According to media reports, Governor Lowe pointed out that these policy measures have been helpful by keeping financing costs extremely low, while at the same time maintaining lower exchange rates than otherwise, aiding credit supply to businesses and strengthening household balance sheets.
The marginally low interest rates have also been a key factor leading to positive results observed across markets. However, over the past couple of weeks, market pricing has fuelled expectations of a cash rate hike in the coming months. This comes despite RBA’s efforts to continually focus on inflation target of 2-3% before increasing the cash rate.
IN CASE YOU MISSED: RBA continues with quantitative easing, leaves interest rates unchanged
The Wage Scenario
The current wage growth is recorded at 1.4%, a major letdown from the RBA’s sustainability rate of 3% required to meet inflation expectations. The current wage growth rate has been recorded to be the lowest on record.
The dip in the wage growth had been observed long before the pandemic hit Australia. The pandemic has further hindered the process of wage growth creation, thus increasing the time required to achieve a wage growth of 3%.
Therefore, a path back to normalcy would require a tight labour market with a well-planned growth horizon to achieve the same. Previously, low unemployment rates were accompanied by only momentary lifts in wages and inflation. However, in the recent times, Australian wage growth has refused to show strength, in spite of unemployment being at a 50-year low.
ALSO READ: RBA unravels minutes of Feb policy meeting: Key takeaways
Wages and the Subsequent Inflation Implications
The RBA’s inflation target is an important threshold, upon which major policy decisions hinge. RBA governor Philip Lowe commented that in the absence of a shock to the market, it might be impossible to achieve the targeted level of inflation and thus, wage growth.
Governor Lowe added that for the inflation target to be achieved, wage growth must be “materially higher than it is currently.”
There are a bevy of factors affecting the inflation rate which include reversal of pandemic-related price reductions, demand and supply related price changes and other transitory factors. However, wage growth is the anchor against which inflation expectations are cemented.
The RBA estimates that the wage growth consistent with the targeted inflation rate is likely to be observed by 2024. Consequently, cash rate is also expected to be maintained at the current level till at least 2024. The 3-year yield target continues to remain the same at 10 basis points due to no expectations of a cash rate hike.
RELATED READ: RBA Governor bats for continuation of monetary stimulus
