RBA: Patience is key for employment and wages growth - TDS

In a trifecta of Antipodean disappointment today, the RBA Governor’s speech on “The Labour Market and Monetary Policy” was not a market-moving event (the other disappointments were the RBNZ Assistant Governor speech on what is inter alia neutral monetary policy, and Australian Q2 CPI coming out as expected), explains the analysis team at TDS.

Key Quotes

“The speech was detailed, noting the prevalence of part-time employment, the dominance of services employment, and the new era of slow wages growth (internally and domestically). However, nothing in the speech was really forward-looking, and well short of providing any policy guidance.”

“Perhaps to push back on the Fed tightening cycle that is well underway, and the Bank of Canada tightening earlier this month (and ECB hawkish noises) Governor Lowe said "These central banks lowered their interest rates to zero and also expanded their balance sheets greatly. We did not go down this route".”

“In response to a question, Governor Lowe suggested that the Bank’s 'business liaison' program isn’t awarding higher wages growth, with similar wages growth to recent years. Lowe seems to suggest that if wages growth remains at around 2%, “it would be difficult to get inflation above 2.5%/yr”.”

“The Bank forecasts a pickup in wages growth over time, and in the May Statement on Monetary Policy expected core inflation to remain around 2% next year, rising to 2½% by mid-2019. We expect a similar underlying inflation path in next week’s August SoMP update.”

“On the exchange rate, in response to a question about competiveness, Governor Lowe clearly stated that “it would be better if the exchange rate was lower than it currently is”. This is consistent with RBA language for quite some time, usually phrased as “further appreciation would complicate this [non-mining] adjustment”.”