Analysis: Case Strengthening for 40bps RBA Hike in June

(This Analysis was first published on Tuesday, May 10 at 12:31 PM as an email to premium subscribers

By Sophia Rodrigues

(Sydney, May 10, 2022)—One data that became a clincher for the Reserve Bank of Australia’s decision to raise the cash rate last week has risen further in the latest survey, supporting the case for a 40 basis point rise at the next June meeting.

The RBA’s cash rate target is currently at 0.35%. A 40bps rise would take the rate to a more conventional 0.75%.

The National Australia Bank’s April business survey, published Tuesday, showed labor cost growth reached 3.0% in quarterly terms, rising further from a revised 2.8% in March, which was well above the previous peak of 2% in late 2006. This brings the three-month average to 2.6% compared with 2.1% in the last survey.

At the May board meeting, the RBA used this data and its own liaison as “evidence” that wages growth is picking up. The RBA judged this evidence was so strong that it needn’t wait for the official wage price index and other labor cost indicators in national accounts to be published by the Australian Bureau of Statistics on May 18 and June 1, respectively.

The official ABS releases will still be important releases, but the NAB survey and RBA’s own liaison could override them in interest rate deliberations because they are more “current.”

The RBA has not made a specific reference to the “NAB” survey in its cash rate decision, governor’s speech or the Statement on Monetary Policy.

In the SOMP, the RBA said the outlook for private-sector wages growth is stronger than a few months ago, reflecting the upgrades to the labour market and inflation forecasts.

The RBA said firms in its liaison program expect materially higher wages growth over coming quarters and business surveys also indicate that labour costs are picking up.

“More timely information from the Bank’s business liaison program and business surveys suggest that growth in labour costs has picked up further over the course of this year, and that many firms now anticipate wages growth will increase more quickly in the period ahead,” the RBA said.

The NAB survey also showed purchase costs rose further to 4.6% in April, taking the three-month average to 3.9%, well above the previous record of 3.4% touched in March.

Final products prices and retail prices slowed in April, but NAB said, “these rates of price growth remain high in the history of the survey and the strength in underlying costs suggests prices are likely to continue to rise over coming months.”