RBA Debelle: Need Tight Labor Market to Hit Inflation Target

• Published on
• 26 Nov 2019, 12:00 AM

By Sophia Rodrigues

Australia needs a sustained period of tight labor market to ensure inflation rises within the 2% to 3% target band on a sustainable basis, Reserve Bank of Australia deputy governor Guy Debelle said Tuesday.

Debelle was speaking at the Australian Council of Social Service National Conference 2019 in Canberra. His speech was titled, “Employment and Wages.”

Debelle used the speech to give more background to the forecasts in the RBA’s recent Statement on Monetary Policy where it expects wages growth to remain at the current rate of 2.2%-2.3% until December 2021. The forecasts also show the unemployment rate remaining around 5.2%, before slowly declining to 4.9% by the end of the forecast period.

The forecasts show the RBA doesn’t expect the labor market to tighten even by the end of the forecast period.

Debelle reiterated the RBA’s forecasts saying wages growth in Australia is expected to remain largely unchanged over the next couple of years.

“The more wages growth is entrenched in the 2s, the more likely it is that a sustained period of labour market tightness will be necessary to move away from that,” Debelle said.

Australia’s wage price index, a key measure of wages growth, rose 2.2% y/y in Q3, according to the latest data published by the Australian Bureau of Statistics.

According to Debelle, an increase in proportion of firms expecting stable wages growth of 2% to 3%, and rise in new enterprise agreements with a term of three years or more which have wages growth of 2.5%, point to the unlikelihood that wages growth will pick up over the next couple of years.

For wages growth to accelerate, labor market will need to be tight for a sustained period, Debelle said, adding, that an acceleration of wages growth is needed for inflation to be sustainably within the RBA’s target band.

In the speech, Debelle talking about the factors behind the slowing in wages growth since 2012. They include increase in labor force participation and fall in share of jobs paying wages growth of more than 4%.

Debelle said the rise in wage outcome in the 2s was also due to “downward real wage rigidity” where nominal wage changes follow expected rate of inflation especially when wages growth is at a low level.

--Contact: sophia@centralbankintel.com