Download the PDF
Interpreting the RBA signposts to rate decisions
In last week’s Brief (Is the RBA done-and-dusted?), we indicated several signposts that would guide us as to the future path of the RBA’s rate moves. Two of those signposts, wage data and employment data, were released this week.
Annual wage growth moved higher in the September quarter to 4.0% from 3.6% in the June quarter. This continues a trend that began about four years ago and has seen wage growth rise from its lowest recorded annual rate of 1.3% in the December quarter of 2020 to 4.0% currently.
Momentum in the wage data was also strong, with the quarterly rate lifting to 1.3%; the highest quarterly rate in the history of the Wage Price Index (the measure of wages most used by the RBA). We flagged that an annual wage outcome more than 4.0% would be one of the necessary signposts required for the RBA to undertake another rate hike.
The outturn was in line with our, and the market’s expectations and just on 4% (not north of 4%) and we are comfortable that the first signpost would not trouble the RBA. But how can we be sanguine given the strong momentum?
The current rate was pushed up by several one-off factors including the aged-care worker pay rise and increases in minimum and award wages that have been high because of the high inflation rates. The 15% lift in aged-care workers’ wages is a one off, and the minimum and award wage increases will abate as inflation continues to edge down.
Wages will continue to grow, but at a much slower rate; most likely at a sub 1% quarterly growth rate. That will see annual wage growth hang around the 4% mark, but not move substantially higher than 4%.
Turning to the employment data, the October outturn was an absolute cracker with 55k jobs added over the month. Even in the face of such a strong jobs outcome, the unemployment rate managed to nudge higher to 3.7% from 3.6%.
Our labour signpost for the RBA to remain on hold was an ongoing increase in the unemployment rate, which of course, happened. But should the strength in the employment numbers give you concern the labour market is running too hot?
Ordinarily, such a large jump in employment would signal a very strong economy and that would be of concern from a monetary policy perspective. But the monthly data has been extremely volatile of late, driven by shifts in migrant intake.
If we step back and look at the trend in employment, the trend rate of job growth has slowed from 40k a month at the start of the year to below 30k currently, a gradual easing over the year in the tightness in the labour market. And that trend slowdown in employment will continue over the remainder of the year and into 2024 in the face of weak underlying economic growth.
This week’s wage and employment data continue to signal that the Australian economy is headed for a soft landing. The term Goldilocks is once again being evoked to describe the outlook for the economy; a slowdown that is not too cold to provoke a recession (and hence rate cuts), nor growth that is too hot as to stall the decline in inflation back to the RBA’s target band of 2% to 3% by the start of 2025 (and hence not too hot to provoke rate hikes).