RBA Minutes highlight labour market uncertainty - Capital Economics

Paul Dales, Chief Australia & New Zealand Economist at Capital Economics noted that the minutes of February’s Reserve Bank of Australia meeting do a good job of summarising the uncertainties surrounding the labour market and wage growth and how they will influence interest rates.

Key Quotes:

"This is why the RBA has been downplaying the chances of an interest rate hike this year and why we suspect the first hike may not come until the second half of next year.

The minutes restated the comments used in February’s policy statement that the rise in inflation to the 2-3% target was expected to “occur only gradually”. The issue is that “even with the strength in the labour market, wage growth was yet to pick-up”. We will know more when the Q4 wage price index is released tomorrow, but the RBA highlighted two big uncertainties.

First, “members noted that it was uncertain how much spare capacity existed and how quickly it might be eroded”. In other words, how far below the current rate of 5.5% does the unemployment rate need to fall to reach full employment? Second, “uncertainty remained about how employers would respond as spare capacity in the labour market diminished”. So even when full employment is reached, will that boost wage growth much?

Nobody knows the exact answers to those two questions, but the lessons from the US, UK and Japan, who all have much tighter labour markets than Australia, is that the unemployment rate probably needs to fall further than widely expected to generate even modest rates of wage growth.

Add in the acknowledgement by Assistant Governor Michelle Bullock in a speech earlier today that “high debt levels will influence the calibration of interest rate changes” and the combination of low wage growth and high debt will probably keep interest rates in Australia on hold for longer than the financial markets currently expect."