(Australian Associated Press)
The Reserve Bank is uncertain when a return to decent wages growth will boost weak inflation, and the board’s remarks have sent the dollar plunging to its lowest level in five months.
Minutes from the Reserve Bank’s Melbourne Cup day meeting revealed members are mindful that globalisation and technology mean low unemployment doesn’t necessarily place upward pressure on inflation.
The RBA left the cash rate at a record low of 1.5 per cent at its November meeting, when board members noted they were unsure when wages growth will eventuate.
They expect salaries will gradually grow as the unemployment rate falls and the the dampening effects of the end of the mining boom abate.
“Members noted, however, that there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure,” the RBA said in its meeting minutes.
“Pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure.”
The Australian dollar dropped after the release of the minutes, falling from 75.58 US cents to 75.33 US cents by 1247 AEDT, the lowest level since June.
Board members said persistent competitive pressures would influence the outlook for inflation, which is forecast to limp towards the 2.25 per cent mark – just inside the bank’s target range – by mid-2019.
“They observed that competitive pressures had led food and other retailers to alter their business models in an effort to reduce their cost structures.
“These competitive pressures on both retail margins and costs were expected to continue for quite some time.”
The board members noted in most advanced economies, wages growth had been low despite spare capacity in the labour market continuing to fall.
“They discussed the possibility that globalisation and technology were leading wage growth to be less responsive to changes in the demand for labour, which could continue for a while.”
Royal Bank of Canada chief economist Su-Lin Ong said wages growth had likely hit rock bottom in 2017.
“But, consistent with the global experience, it is difficult to see a significant and sustained acceleration in wages growth or unit labour costs,” she said.
Ms Ong tipped the RBA would hold the cash rate steady in 2018 and begin raising rates the following year, ending 2019 with a two per cent cash rate.
“Soft underlying domestic demand, with in particular uncertainty over the outlook for housing, barely within-target inflation, and ongoing excess labour market capacity, points to little reason for the cash rate to move from 1.5 per cent until early 2019,” she said.