On Wednesday, released data showed Australian wage growth unexpectedly fell from 15-year highs in the first quarter. This could signal the cycle’s top and suggest the labor market is finally beginning to loosen.
Most importantly, the retreat should allay long-standing worries about a possible price-wage spiral. Consequently, it will reduce pressure on the Reserve Bank of Australia (RBA) to raise interest rates further.
“With job vacancies dwindling and the labour market loosening, we think that employers will grant smaller pay hikes over coming months,” said Marcel Thieliant, head of Asia-Pacific economics at Capital economics.
“Accordingly, today’s data will ensure that the RBA doesn’t hike interest rates any further but we still expect the bank to wait until Q1 next year before loosening policy.”
On Wednesday, the Australian Bureau of Statistics released data showing a 0.8% increase in the pay price index during the March quarter. This was lower than the 0.9% increase predicted by the market. Since late 2022, this rise has been the least.
Annual wage increase decreased slightly from 4.2% to 4.1%, which was again below forecast. Notably, private sector growth also fell to 4.1%, marking the first decline since the third quarter of 2020.
Public sector wages increased by a meager 0.5% during the quarter, bringing the annual growth rate down from 4.3% to 3.8%.
After years of bad results, the overall yearly wage increase was still barely sufficient to raise pay over the 3.6% inflation rate.
Starting in July, a significant tax cut package will further boost wages. Additionally, in its annual budget on Tuesday, the Labor administration revealed additional energy and rent cost refunds.
The rebates will mechanically reduce headline inflation for a while, but they may also increase demand by increasing spending power.
Goldman Sachs economist Andrew Boak stated, “The positive fiscal impulse to growth is likely to be seen as unhelpful at cooling the economy at the margin.”
“However, we do not expect the central bank to be too worried about the new “cost of living” initiatives fuelling a surge in demand against the current backdrop of extremely weak trends in consumer confidence and per capita consumption.”
Despite acknowledging the possibility of the RBA postponing rate cuts until next year due to sticky service inflation, he still believes the RBA will commence reducing rates in November.
The market projects no rate reduction until April 2025. Additionally, it indicates an 8% likelihood of one more rate hike this year.
Click here for more news on Finance and Investing.