Low wage growth is no guarantee that interest rates won't rise in Australia

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While the outlook for wage growth remains sluggish, that alone won’t necessarily stop the Reserve Bank from raising interest rates next year.

Data this week showed that wage growth for the June quarter came in flat, as private sector wages growth again under-performed against gains in the public sector.

In fact, while private sector wage growth has remained broadly flat over the last five quarters, this chart from ANZ shows that private wage growth has slightly decreased in that time:

ABS, ANZ Research

The majority of Australians are employed in the private sector and there’s a pretty clear connection to be drawn between wage growth and interest rates, given the impact of higher wages on the inflation outlook.

If people are earning more they’re generally happier to spend more on goods and services.

A notable uptick in inflation from its current level of 1.9% would be a catalyst for Australia’s central bank to raise interest rates, given its mandate to keep the rate of inflation within a target range of 2-3%.

But does Australia need wage growth to pick up before interest rates will climb? ANZ’s Head of Australian Economics David Plank doesn’t think that’s necessarily the case.

“We don’t think faster wage growth is necessary before the RBA starts to tighten,” Plank said.

Plank said that if monthly employment data continues its recent strong trend, and unemployment falls back towards 5%, that will give the RBA enough confidence that around the inflation outlook to go ahead and raise rates.

He also said that financial stability could factor into the bank’s decision making, with a rise in rates one option to prevent the housing market from overheating.

“This is not to say it will hike in these circumstances, just that we don’t think higher wages are necessary for a tightening cycle to get underway,” Plank added.

Plank noted that wage growth in the September will almost certainly pickup due to a rise in the minimum wage.

The Fair Work Commission announced a 3.3% increase in Australia’s minimum wage to $18.29 an hour effective from July 1.

“But the impact of the minimum wage increase will make it somewhat more difficult to determine the underlying pace of wage growth,” Plank said.

In other words, the market still has to wait until February next year for Q4 2017 wage growth figures to be released, in order to confirm that the Q3 pickup was only temporary in nature.

Plank said that if the data in 2018 reveals the lack of any sustained pickup in wage growth, then any tightening of monetary policy would only be moderate in nature.

“As it is, the absence of any sign of pickup means we remain comfortable with the expectation that the RBA will be on hold through all of 2018,” he said.

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