Australia | Aug 13 2008
By Andrew Nelson
The prospect of a September rate cut just got a little better after new Labour Price Index data showed wages rose by 1.2% in the June quarter and by 4.2% over the year. The news seems to take one more stumbling block out of the RBA’s path in deciding to cut rates. But it’s not that simple.
Strong growth in wages boosts domestic spending, increases corporate costs and reduces company profits. This increases prices and puts upward pressure on inflationary measures, making it necessary for our ever watchful regulator to step in and regulate. So let’s not get too carried away, as the 1.2% rise was still at the top end of the range over the past few years.
But as Commonwealth Bank economists point out, it is still shy of levels that would worry the central bank in terms of increasing inflationary pressures. As annual growth continues to run in the low 4s, a rate that over time is consistent with inflation running between 2 and 3%, it stays well within the RBA’s stated comfort range, CBA analysts believe.
Westpac somewhat downplayed the strength of the result, pointing out the RBA’s expectation for a rising unemployment rate over the year ahead should placate any short-term concerns over the wages outlook.
But economists at ANZ were a little more cautious, saying that while the slightly stronger than expected read is not likely to pose too much of a problem to the RBA, it could, over time, signal a genuine pick-up in wage inflation. Economists there are of the belief the market is pricing in too many rate cuts too soon.
They reason is that if the economy doesn’t slow quickly enough and unemployment rates don’t rise enough, the RBA will become concerned that higher inflation and inflation expectations could become entrenched.
“We are concerned about that, but will not know how likely this is for at least another six months,” ANZ economists state.
A September/October cut?