The Reserve Bank says it expects a fall in the unemployment rate to finally translate into a growth in wages, as the global forces that have distorted the long-held relationship begin to “abate”.
In its quarterly statement of monetary policy, published on Friday, the central bank said there was still “considerable uncertainty” as to when and how quickly wages and household spending would pick up as the economy strengthens.
Wage growth, a key determinant of the inflation, was expected to be “gradual” but higher than it had previously forecast, it said.
The central bank had flagged earlier in the week that an improved economic outlook led it to forecast a decline in the unemployment rate to 4.75 per cent by 2020. The unemployment rate has not fallen below 5 per cent level the Reserve Bank has determined to be ‘full employment’ since January 2009,
But economists have questioned whether breaching full employment would put upward pressure on wages given this had been slow to occur in other developed economies.
The Reserve Bank said wages growth had been lower than could be explained by measures of spare capacity in the labour market and inflation expectations.
Instead it said “globalisation, technological change, the changes in relative bargaining power” had contributed to lower wage growth.
“The central forecast for a moderate increase in wages growth over the next couple of years assumes that some of these factors will continue to weigh on wages growth for a while yet,” The Reserve Bank said.
“However the recent increase in wage growth in other advanced economies may indicate that some of these global factors are starting to abate, or can be offset by sufficiently tight labour market conditions.”
Low wage growth had also contributed to an increase in household debt, which the Reserve Bank said could weigh on consumption.
The recent decline in house prices could affect household consumption, the Reserve Bank said, but said the relationship between property values and spending was uncertain.
“It is possible that the consumption decisions of highly indebted and/or credit constrained households could be more sensitive to an easing in house price growth than to the previous strength, especially if income growth were to soften at the same time.”
The Reserve Bank is forecasting economic growth to average 3.5 per cent this year and in 2019, higher than its previous August estimate. Inflation was also expected to increase a little earlier than it had previous forecast from 2 per cent to 2.25 per cent by the end of 2019
The Reserve Bank has held the cash rate steady at 1.5 per cent since August 2016, a record 27 months.
In Friday’s statement, the Reserve Bank said it did not see a case to “adjust the cash rate in the near term” despite the progress made in reducing unemployment and ensuring the inflation rate was consistent with its target.