Australian Dollar: Record-Low Wage Increases Won't Shake the RBA into Another Rate Cut

- Aus reports record-low wage increases
- But unlikely to prompt further rate cuts at RBA
- AUD to be supported in 2021 by global recovery

RBA and the AUD

Above: Woman Wearing a Mask Crossing Road Near Flinders Street Station in Melbourne. Image © Adobe Images

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Record low wage price rises are unlikely to sway the Reserve Bank of Australia and means the current cycle of interest rate cuts could now be over, which in turn translates into firming Australian Dollar over coming months.

Australia's statistics authority on Wednesday reported record-low wage growth amidst the fallout from the ongoing covid-19 crisis. The country's official Wage Price Index grew just 1.4% year-on-year in the third quarter of 2020 as firms kept a tight hold on their purse strings.

The quarter-on-quarter rise was just 0.10%.

"The September quarter is generally a quarter of solid wage growth, however, the impacts of the COVID-19 pandemic contributed to a subdued rate of wage growth in September quarter 2020," says Andrew Tomadini, Head of Price Statistics at the ABS. "Organisations continued to adjust to the economic uncertainty, recording fewer end of financial year wage reviews and delaying enterprise bargaining agreement increases. This led to a significantly reduced number of jobs recording wage rises when compared to previous September quarters."

Economists at Barclays say Australian wage growth will likely remain subdued over coming months, in line with increasing spare capacity in the labour market, which is likely to persist for a long time.

Around 25% of firms recently surveyed by the RBA said they would implement wage freezes in the year ahead and the central bank expects WPI growth to remain subdued at ~1.25% y/y by the end of 2021 and ~1.75% by the end of 2022.

"Australian wages rose just 0.1%/qtr in Q3 20. The 2020/21 tax cuts can provide some offset to weak wage growth. But with unemployment and underemployment high, we expect it will be a long time before inflation and interest rates begin to rise. There is a risk prices take even longer to recover if low wages become entrenched," says Kim Mundy, an economist with Commonwealth Bank of Australia.

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The sombre developments suggest organic inflationary pressures in Australia are likely to remain subdued for the foreseeable future, thereby easing pressure on the Reserve Bank of Australia (RBA) to raise interest rates.

Indeed, on the face of it, the falling wage pressures could invite the RBA into further rate cuts without risking a rise in inflation.

The developments are therefore broadly negative for the Australian Dollar given a rule of thumb in foreign exchange markets is that when a central bank cuts interest rates the currency it issues declines in value.

Therefore, developments in Australia concerning wages and prices are a textbook negative for its currency.

However analysts at Barclays say the November cut to 0.10% at the RBA is likely to be the final in the current cycle and that the record-low wage increases are unlikely to shift the dial for monetary policy.

"We think, combined with the package announced in March and the expansions of programs made thereafter, the RBA has now provided sufficient easing to support the economy's return to growth. As such, the RBA is unlikely announce any further major policy changes before May 2021, in our view, unless there is a resurgence of COVID-19 cases in Australia," says Rahul Bajoria, an economist with Barclays.

The RBA delivered a large easing package at its meeting on November 03 where it cut the cash rate to 0.10% and lower the yield it would target on three-year government bonds to 0.10%. It also announced a quantity-based bond purchase programme that means it is now engaged in a more traditional form of quantitative easing.

The scale of the announced programme therefore suggests the prospect of further easing is limited, particularly given the improved mood amongst investors owing to the success of two covid-19 vaccine candidates.

Indeed, 2021 is shaping up to be a year of recovery which tends to support economies such as Australia's which will provide the raw materials for the growth.

"We think 2021 will be the ‘year of renewal’. Renewed growth, expansive fiscal and monetary policies, and fresh political leadership mean we should also expect new market leadership in 2021. Looking beyond the year ahead, investors should also consider sectors undergoing technological transformation. If the last decade was about investing in technology itself, we think the next will be about investing in the disruptors challenging the status quo in other industries," says Mark Haefele, Chief Investment Officer, UBS Global Wealth Management.

"The vaccine and potential FOMC monetary policy easing can lift AUD in the medium term," says CBA's Mundy.

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