“As the labour market tightens, wages growth and inflation should increase gradually.” It’s the Reserve Bank mantra that underpins Australia’s economic policy settings.
This week in finance:Wage price index (Wednesday), employment/unemployment (Thursday)Reporting season: Wesfamers, CSL (Wednesday), Telstra (Thursday)Reserve Bank governor Philip Lowe’s biannual parliamentary testimony (Friday)
It’s embedded into most RBA economic communiques — post rate decision statements, speeches, quarterly monetary policy updates; it’s a given it will be in governor Philip Lowe’s testimony to Parliament this week as well.
It’s the conviction behind the RBA’s determination that the next time rates move, it will be up — an optimistic, forward looking belief.
It needs to be, because looking backwards it hasn’t stacked up so well.
For all the jobs created in the past couple of years, the labour market hasn’t tightened and wage growth is stagnant.
Wage growth near historic lows
Wage growth remains near historic lows and inflation is stuck below where the RBA wants it — its economics team even nudged down its short-term forecast last week.
The mantra is likely to be further tested this week with the release of key wages and jobs data.
The betting is it will be more of the same. More jobs created, plenty of slack in the labour market and wages creeping incrementally higher.
Citi’s chief economist Paul Brennan, for one, thinks the RBA is overly optimistic.
“The international experience is that there is more spare capacity in the labour market than generally thought to be the case … [and] wage pressures are less sensitive to falling unemployment than might have been expected,” Mr Brennan said.
“The bank’s own forecasts are for only a half of one percentage point reduction in the unemployment rate by the end of 2020.
“Is this really enough and