MNI POLICY: RBA Eyes 2.5% Sustainable Wage Growth Level

The Reserve Bank of Australia believes wages growth remains too high, indicating labour market conditions are still tighter than consistent with its estimates of the non-accelerating inflation rate of unemployment, and that it would prefer unit labour cost growth to slow to around 2.5%, MNI understands.

RBA officials judge that both the Wage Price Index and unit labour costs remain above levels considered consistent with achieving the inflation target sustainably over the medium term, given current productivity assumptions. The WPI rose 3.3% y/y over Q1, while unit labour costs rose similarly over Q4. 

While the WPI is the measure most commonly associated with wages growth, the Bank places greater emphasis on broader indicators, particularly unit labour costs, when assessing inflationary pressure in the economy.

The RBA considers unit labour costs – to be updated via Q1 National Accounts data on June 6 – a more useful gauge because they incorporate productivity developments, though officials acknowledged the series is more volatile than the WPI. 

Unit labour cost growth remains well above what officials consider a sustainable pace, which they suggest is closer to 2.5%.

APRIL UNEMPLOYMENT

Seasonal adjustments related to the timing of Easter likely drove April's uptick in unemployment to 4.5%, with youth unemployment accounting for much of the rise, continuing a pattern of volatility observed over the past year.

While employment and unemployment outcomes were weaker than the Bank had forecast, total hours worked and average hours worked both increased solidly in April, implying that underlying labour demand may not have weakened materially.

Broader indicators such as job advertisements have remained relatively resilient, while some firms may have adopted a “wait-and-see” approach to hiring following the escalation of the conflict in the Middle East, temporarily slowing recruitment without signalling a broader deterioration in economic conditions.

NEUTRAL RATE ESTIMATE

Neutral interest rate estimates are highly uncertain and are not a key guide for policy decisions by the Board. There is no mechanical relationship between higher oil prices and estimates of the neutral rate, particularly in the case of a temporary energy shock.

For more persistent rises in oil prices, the Bank believes the effects on the neutral rate and potential output are ambiguous, especially for a resource-exporting economy such as Australia’s.

The Board instead focuses more directly on the implications of higher energy prices for inflation, economic activity, consumer sentiment and labour market conditions, as well as whether inflation expectations begin to rise more persistently over the medium term.