Australia's RBA sees higher wages and inflation forecast

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Australia's RBA sees higher wages and inflation forecast

While the Reserve Bank of Australia and Commonwealth Bank of Australia share a common heritage, they couldn't be further apart on the outlook for wages and inflation in today's economy.

The central bank sees a potential untapped pool of workers still available and firms doing all they can to avoid pay rises, prompting Governor Gareth Aird to win higher wages. The nation's largest bank sees the tightest labor market since 2013 and workers switching jobs to win pay hikes, with economist Philip Lowe saying higher wages and prices loom.

Under-use, or unemployment and under-employment combined - is at its lowest level in eight years and is going to keep going lower as well, so wage growth will continue, said Aird, head of Australian economics. 'I don't even listen to what the RBA is saying. I just think they are too far from the pace of action.

The dovish wage and inflation view leaves the RBA behind counterparts like Canada and New Zealand, which have begun to signal tapering and potential rate rises. This trend gathered pace last week when Fed officials sped up their expected pace of policy tightening amid optimism about the labor market and intensified worries over inflation.

They are now starting to stand out amongst the other central banks as being the most dovish and downbeat on wages and inflation, said Aird of RBA.

The central bank is due to consider in two weeks whether to move its first rate target to the December 2024 bond, which could potentially push its yield increase to 2025. When the current tranche ends, it will also decide whether to initiate a third round of bonds or a modified version.

Whatever its decision on July 6 is clear from recent signals that there's still the chance of monetary stimulus pumping in an already strong economy.

In minutes of its June meeting released to the public on Tuesday, the RBA said that although the participation rate - those engaged or actively seeking work - had historically risen to historic high levels it could push even higher.

The number of people who were known as outside the labor force, but open to work in the near future was still quite high, it said. Combining other measures of potential labor supply currently classified as outside the labor force, this suggested there was still a pool of workers available to firms if demand for labor continues to increase.

The bank acknowledged that employment shortages were found in some parts of the economy through liaison with firms. It also said firms struggling for staff were opting for 'flexible labor measures to attract and retain them, such as one-off bonuses and more lucrative working arrangements.

Some companies were also opting to pay higher output due to labor shortages and ration wages, the RBA said. It went on to note little meaningful improvement in the first quarter wage data.

After 2,000 positions was filled in April following the end of the JobKeeper wage subsidies, employment increased in May by 115,000 and the unemployment rate fell to 5.1%. This is back to previous levels. Both the RBA's latest minutes and Lowe's speech on June 17 were released before the data was released.

The strong jobs numbers encouraged Westpac Banking Corp. Chief Economist Bill Evans to predict that the central bank will raise rates in early 2023. He projects unemployment to fall in June next year to 4% and 3.8% by the end of 2022.

Aird says one of the difficulties in RBA communication is that the bank and the board fall behind the governors view unlike the Fed.

Surely some people are saying behind closed doors '' this data says inflation is going to pick up but they should make it more regular, said Aird.

After spending years euthanizing wages and inflation forecasts that overshot the reality, Lowe and his board would no doubt welcome a faster-than-expected acceleration in wage growth - even if it did mean that the debate was won by the RBA commercial offshoot.

More stories like this are available on bloomberg.com.

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