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Weak wage growth to persist, warns RBA

Low wage growth will persist in Australia for some time, the Reserve Bank has warned, with the situation worsened by new workplace agreements containing smaller pay rises coming into effect.

A day after RBA governor Philip Lowe said a lift in wages would be "a welcome development" for the economy, the central bank said stagnation in paypackets will worsen in the near term because of new enterprise bargaining agreements struck on lower wage rises than the deals they replace.

"Other things being equal, this will induce some inertia that will limit overall wage growth for a time," the RBA said in its quarterly Statement on Monetary Policy, released on Friday.

The bank said it will be some time before Australia's unemployment rate drops to what it considers full employment and also before the limp inflation rate - currently at 1.9 per cent - reaches the midpoint of its preferred two to three per cent target band.

Wage growth would be a key determinant of how quickly inflation increases, the RBA said.

RBC Capital Markets economist Su-Lin Ong said, given the considerable slack in the labour market because of high underemployment, Australia would need a sustained period below the non-accelerating inflation rate of unemployment (NAIRU) to put upward pressure on wages.

"This suggests that the RBA will sit on its hands for a while longer," she said.

"Domestic considerations argue for patience in beginning policy normalisation."

On Thursday, Dr Lowe told an economics forum that a boost in wages growth would be welcome as the current weakness was dampening consumer spending and affecting households' ability to pay down debt, which is uncomfortably high.

St George Bank senior economist Janu Chan said expectation that spare capacity will persist in the labour market suggests that the RBA would not be willing to lift interest rates for quite some time.

"We continue to expect the RBA will leave the official cash rate on hold for all of 2018," she said in a note.

Federal Treasurer Scott Morrison has also backed the RBA's approach.

"What we've seen is the labour market tightening and with all of those jobs being created, we can expect that to see pressure for wages to grow," he told reporters in Sydney on Friday.

Meanwhile, the RBA on Friday addressed the recent turmoil on global stock markets, where in the US Wall Street plunged in Thursday trading on renewed fears of higher inflation, triggering a fall in Australian stocks on Friday.

The volatility on global stock markets has not derailed optimism over continuing corporate earnings growth, the bank said.

The RBA said, while global stock prices have fallen as bond prices rise and investors worry about rising inflation, equities remain higher than they were a year ago "reflecting the strengthening global economy and expectations of ongoing strength in corporate earnings over the next few years".

Austrlaian Associated PressBack to Breaking News

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