November 21, 2017 / 4:16 AM / a year ago

Australia’s uncertain on wages recovery as it holds rates at record lows

SYDNEY (Reuters) - Australia’s central bank warned of “considerable uncertainty” about how quickly wages growth and inflation might pickup, as it left interest rates at record lows for more than a year.

FILE PHOTO: Pedestrians walk past the Reserve Bank of Australia building in central Sydney, Australia, March 7, 2017. REUTERS/David Gray/File Photo

Minutes of the Reserve Bank of Australia’s (RBA) November meeting showed policymakers pondered subdued consumer prices and pay rewards across the economy against the backdrop of sky-high household debt.

The meeting came as the RBA cut its forecasts for core inflation, which is now seen lurking under its long-term 2-3 percent target band for another two years.    

“Members noted that there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much of these would add to inflationary pressure,” the minutes showed.

Figures out since the meeting showed wages grew at an annual pace of just 2 percent in the third quarter, again disappointing hopes for an acceleration.    

“In particular...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 minutes showed.

The RBA had been hopeful of inflation firing up as employment proved surprisingly strong, but data out last month showed another quarter of lukewarm consumer prices.    

Tepid inflation was a major reason the central bank cut interest rates to an all-time trough of 1.50 percent in August 2016.

The scrooge-like growth in salaries is eating into spending power and slugging the retail sector where sales suffered a rare contraction in the third quarter.    

In a speech last week, RBA Deputy Governor Guy Debelle said policymakers were well aware that the country’s heavily indebted household would struggle if interest rates were to rise sharply, but there was no shock on the horizon to force such an increase.    

Indeed, the futures market has responded by pushing out the likely timing of a rate hike to early 2019. A couple of months ago, a move had been priced in for July 2018.   

The central bank’s economic outlook was guardedly optimistic, noting that strong jobs growth across the country was supporting household incomes.   

In addition, government spending on public infrastructure had boosted private business investment and is likely to support economic growth for some time.   

Tuesday’s minutes showed the RBA expects Australia’s A$1.7 trillion economy to grow around 3 percent over the next few years as the drag from a mining downturn diminishes and exports gather momentum.    

A further appreciation in the local dollar could jeopardise those forecasts, members noted.   

The local dollar is presently around $0.7550, having fallen back from atop $0.8000 in September.

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