RBA Says Wages Growth Need To Be Sustainably Above 3% To Meet Inflation Goal

--Change to 3-year yield target of 10bps not warranted
--Conditions requiring increase in cash rate unlikely until 2024 at the earliest
--Remains committed to doing what it reasonably could to support economy
--Wages Growth Need to be sustainably above 3% to meet inflation target

By Sophia Rodrigues

(Sydney, May 18, 2021)—The Reserve Bank of Australia said it was likely that wages growth would need to be sustainably above 3% to generate inflation consistent with the target.

In the minutes of the May board meeting, published Tuesday, the RBA said wage and wage pressures remained subdued, and were expected to remain so due to spare capacity in the economy and a strong focus on cost containment by businesses.

Public sector wage policies were also likely to restrain aggressive wage outcomes, the RBA said. As a result, it would take time for the economy to generate sustainable wage increases of above 3% that would likely be consistent with achieving the inflation target, the RBA said.

The RBA’s baseline scenario in the May Statement on Monetary Policy has wages growth at slightly below 2.5% by mid-2023 but the upside scenario has wages growth of around 2.75%.

The RBA said it remained committed to doing what it reasonably could to support the Australian economy and would maintain highly supportive monetary conditions until its goals for employment and inflation were achieved. But in a change from recent months, the RBA said it views conditions that would trigger a rate hike as “unlikely” to be met until 2024 at the earliest, rather than “does not expect.”

The RBA said it would consider at the July board meeting whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity. What it would not do is change the target to 10bps.

“Members agreed that a change to the target of 10 basis points was not warranted,” the RBA said.

The RBA would also consider third round of bond purchase program if doing so would assist with progress towards the bank’s goals of full employment inflation. The future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia, the RBA said.

The RBA said the extent of spare capacity in the economy at the end of the forecast period was uncertain which meant the gradual increase in inflation reflected in the baseline forecasts could be slower or faster.

On the international economy, the RBA said global outlook had improved and risks had become more balance. Bond yields had increased to reflect increases in expected inflation to levels that were consistent with or below central banks’ targets.

The RBA noted the Bank of Canada had upgraded its economic projections and updated its expectations for the timing of the first increase in the policy rate which was closely aligned with market expectations.

In New Zealand, market pricing suggested that policy rate was expected to begin to increase in late 2022 or early 2023, and in the U.S. and the U.K. in the first half of 2023.

--Contact: Sophia@centralbankintel.com