We know the RBA is worried about the impacts of rate cuts on the housing and construction sector because the Governor has told us so in his statement after each of the last two board meetings.
Ostensibly that concern is about Australian households borrowing too much and as a result paying too much for housing. It can have destabilising economic impacts if there is an uptick in unemployment as David Murray pointed out earlier this week.
But news that the CFMEU has won a 5% a year pay rise for three years – 2.5% every six months – will concern the RBA as further evidence that it is only housing and construction that are benefiting from low rates.
The AFR reports that the deal has been done between the CFMEU and between 150-200 companies in the sector.
David Noonan, CFMEU national secretary, told the AFR that the union did not agree to any payoffs because of increased productivity of workers.
That may be so.
But what will concern the RBA is that in a world of low inflation, where the Government has only begrudgingly agreed to increase the wage rise for front line Defence personnel to just 2%, this agreement from the construction firms signals a rampant housing market.
That is, if building and construction firms can agree to a 15% pay rise over three years, likely to be at least twice the rate of inflation over that period, this signals that construction is seeing some real capacity pressures.
Of course, we know that Australian dwelling construction this year is likely to set a new record. Equally, we know that building approvals in January, especially for units, rose at a stunning pace.
We also know that economists expect this pace of construction to continue for at least another three years.
But, if construction now has capacity constraints in terms of labour, as this deal suggests, then the positive flow-through for new jobs which the RBA is looking for from more rate cuts is going to be muted.
This highlights the risks of more cuts to economic stability as Governor Stevens highlighted.
It’s the clearest signal yet that the RBA is right to wait and watch before it cuts rates again.
You can read the AFR story here.