The Governor has formally released himself from the guideline in 2021 that rates would not rise until the Wage Price Index lifts by 3%. He is now referring to a broader measure of labour costs which have no specific numerical trigger. The tragedy in the Ukraine has added uncertainty and supported the “patience” theme”.
As expected, the Reserve Bank Board decided to maintain the cash rate at 10 basis points.
Two interesting points came out of the Governor’s Policy Statement.
Firstly, he widened the measure of employment costs from “wages growth at the aggregate level” to “labour costs.”
Secondly, he included some assessment of the impact on the economy of the war in Ukraine.
In the final key paragraph, the condition around wages is “it is likely to be some time before growth in labour costs is at a rate consistent with inflation being sustainably at target.”
Compare that with the February Statement, “it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target.”
“Aggregate wages growth” is the term used by the RBA for the Wage Price Index. Through 2021, in a number of speeches, the Governor referred to the need for the Wage Price Index growth rate to reach 3%+ before he would increase the cash rate.
We have argued that due to the high inertia in the WPI (held back by enterprise bargaining and award wages which are both set for extended periods with lags) the WPI does not capture the momentum in wages in a timely fashion.
The annual rate of growth in the WPI is also impacted by base effects since the growth in the Index in the June quarter last year was only 0.4%. That drag o the annual rate will persist until the June quarter 2022 which is released on August 24.
We forecast that the March quarter WPI will increase by 0.8% lifting the annual rate to 2.5% but we have argued that the last two prints (0.7% and 0.8%) indicate a six month annualised pace of 3.0% and, complemented by other measures such as bonuses, overtime, business surveys, RBA liaison; turnover and the decade low unemployment rate there will be sufficient evidence to begin the tightening cycle on August 2.
The explicit guidance in the Statement today, where the necessary signals around wages that are broader than the WPI, strengthen our case for August lift off.
We continue to downplay any earlier moves given the persistent “patient” theme and the Governor’s preference (appearance before the House of Representatives Standing Committee, February 12.) to see two more CPI’s.
That “patience” theme is consistent with the Governor’s assessment of the tragedy in the Ukraine. He notes that “the war in the Ukraine is a major new source of uncertainty”, and “how long it takes to resolve the disruptions to supply chains is an important source of uncertainty regarding the inflation outlook, as are developments in global energy markets.”
Those issues are key to the RBA’s forecast that underlying inflation declines to 2.75% over 2023 taking some pressure off monetary policy.
Conclusion
We remain comfortable with our view that the first rate increase will be at the August Board meeting.
In today’s statement the Governor has released himself from the constraint that the cash rate will only rise when annual growth in the Wage Price Index prints 3%+.
There is also that air of caution around the war in the Ukraine which feeds neatly into the “patience” concept which the Governor confirms.
“The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”
