MNI INTERVIEW: RBA Overstates Wages, Two Cuts Incoming - Fabo

The Reserve Bank of Australia has likely overestimated 2025 wage growth by about 40 basis points, which could drive at least two additional 25bp cuts to the 4.1% cash rate in May and August as U.S. tariffs hit global output, a former official told MNI.

Justin Fabo, founder at Antipodean Macro and head of international financial markets at the RBA until 2012, said the Treasury’s recent wage price index outlook of 3% over FY2025 was likely closer to reality than the RBA’s February 3.4% forecast. Treasury has a better track record of forecasting wages, which the RBA tends to overstate, he argued. 

The WPI printed at 3.2% y/y in December, closer to the Treasury’s 3.25% 2024-2025 forecast and lower than the RBA’s 3.4% estimate for that period. The Australian Bureau of Statistics publishes Q1 WPI results on May 14, ahead of the Reserve’s May 19-20 meeting. The RBA has consistently pointed to wage growth and labour market resilience as key inflation risks. (See MNI POLICY: RBA Caution As Wages Growth Higher Than It Seems)

“I think there's too much focus on wages numbers, it's just another price,” said Fabo, noting costs typically moved broadly together. “Businesses are still facing some decent income cost inflation, but they can't pass it through. That's telling you something about demand. Firms won't be giving decent wage increases amid the backdrop around margins.” 

While lower global growth, weaker-than-expected wages and softer underlying inflation could lead the RBA to cut 75-100bp over the next 12 months, it will likely keep its language cautious and avoid neutral-rate discussions, said Fabo, who called the RBA’s February cut in late 2024. (See MNI INTERVIEW: Q4 CPI On Track To Surprise - Ex-RBA Economist)

GLOBAL GROWTH

U.S. trade policies will result in lower global economic output over the mid-term. While uncertainty will drive price rises in the short term – particularly among goods – weaker U.S. domestic demand driven by lower real incomes will offset the impact, which will pressure services, he added. 

“I think central banks are much more worried about the near-term demand side effects, and will look through any transitory inflation impact,” he said, pointing to U.S. Federal Reserve Chair Jerome Powell’s comments last week. 

“People are really underestimating how important these downside risks are around global growth. It's a tricky situation for the central banks, who typically have a habit of focusing on the growth implications, because ultimately that can then dampen inflation. My guess is they'll be looking at this global uncertainty and global growth risks quite negatively, and that's just as important as a Q1 CPI number.”