Doubts remain on rate hold despite wage data

Yasmine Raso

Senior Journalist, Financial Newswire

21 August 2023

The positive movement in the latest wage price index (WPI) data for the June quarter has relieved some stress and pointed towards the end of the Reserve Bank of Australia’s (RBA’s) tightening cycle, but GSFM’s Stephen Miller remains doubtful.

The investment strategist said his doubts come despite early indications of modest wage growth, the RBA flagging a “credible path back to the inflation target” with the cash rate remaining at its current level in its previous board meeting minutes, and ongoing China weakness.

“For one thing, there appears to be an emergent tendency for more wage increases to occur at the start of a new financial year (that perhaps aren’t adequately yet captured by backward looking seasonal adjustment techniques),” he said.

“That may mean the September quarter numbers could indicate a substantial acceleration in wage growth as those start-of-financial-year increases take effect alongside the Fair Work Commission’s (FWC) wage review decision, as well as a substantial adjustment for aged care workers.

“In that context, I am still not convinced that the RBA forecasts released with the August Statement on Monetary Policy (SoMP) adequately reflect the upside risks to inflation generated by the FWC decision.

“That decision is likely to see inflation in Australia exhibit a greater degree of “stickiness” than in other developed countries. This is not something that in my judgement is well understood by the market commentariat.”

Miller said he was surprised by the RBA’s decision to declare that the cash rate may already have reached its cyclical peak, calling it a “mistake” to suggest that the risk of a recession would lead to “an indefinite delay in any further policy rate hikes”.

“The lesson from the ‘70s is that any delay on the part of a central bank in articulating a coherent and firm response to an inflation threat only heightens the risks down of a more damaging macroeconomic dislocation in terms of activity and employment down the track,” he said.

“The RBA has been a ‘laggard’ when it comes to tightening and where Australia’s relative inflation performance has been slipping. That is a consequence of the RBA showing a much greater tolerance in terms of the expected timeframe attaching to the return of inflation to target than some other central banks.

“It could mean that the impact on employment and activity growth may well end up being greater than would otherwise have been necessary had the RBA shown some greater application to inflation containment earlier in the piece.

“The return of Australian inflation to somewhere within the target 2-3 per cent band is now forecast by the RBA to be even more elongated than forecast back in May. The RBA project that will not occur until “late 2025” rather than the June quarter 2025 as forecast back in May.

“Any failure to ‘lean in’ to the specific pressures generated by the FWC decision might mean that the scale of rate hikes the RBA need visit on the Australian economy to contain inflation will mean any future dislocation in activity growth and employment will be greater.”