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Australian Dollar: Wage Data Offers Support, But Not Strong Enough to Shake the RBA say Economists

  • Wages rise faster than expected
  • Offering near-term AUD support
  • But RBA won't drop dovish slant say analysts
  • CBA warns this could prompt AUD underperformance

Australian Dollar response to wages

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Australian wages rose at their fastest pace in a decade in the third quarter, but analysts say the figures are not strong enough to shake the Reserve Bank of Australia (RBA) from its dovish course.

The Australian Dollar was nevertheless firm across the board in the hours following news Australia's Wage Price Index (WPI) rose 3.1% in the year to the third quarter, an increase on the previous quarter's 2.6% increase and besting the consensus expectation for a reading of 3.0%.

The quarter-on-quarter increase stood at 1.0% said the Australian Bureau of Statistics, up on the second quarter's 0.8% rise and consensus estimates for a reading of 0.9%.

Australian wages

Above: Australia's Wage Price Index, source: ABS.

"While we don't think this figure will alarm the RBA, it is a large step up from the (upwardly revised) 0.8% q/q reading last quarter. It's therefore unlikely the RBA will pause in December," says Madeline Dunk, Economist at ANZ.

The Australian Dollar is subject to numerous drivers, such as China and global investor sentiment, but from a domestic perspective, the wage figures are, on balance, supportive in the near term.

The Australian to U.S. Dollar exchange rate (AUD/USD) extends an ongoing recovery and is near 0.6770 at the time of writing, its highest level since mid-September.

The Pound to Australian Dollar exchange rate (GBP/AUD) reflects the strength in AUD/USD, falling back 1.7543 over the hours following the release as it gives back some of the gains made during a strong October for Sterling.

The wage data could prompt markets to bet the RBA will have to go higher than previously anticipated on interest rates as stronger-than-expected wages hint at an ongoing build-up in domestic inflationary pressures, something that the RBA would be required to respond to if it wants to help bring inflation back towards the desired 2.0% level.

The RBA has recently slowed down its pace of interest rate hikes, having opted for a 25 basis point move in both October and September, down from previous increments of 50bp.

The minutes of the October meeting showed policymakers wanted to see the impact of the previous hikes come through and that the RBA stood ready to respond to unexpected data.

The RBA's downshift on interest rate hikes is said by analysts to be a potential downward force on the Australian Dollar, as global capital will opt to channel towards higher interest rate regimes.

Australia's wages rose on account of broad-based pressures that included a larger increase to minimum and award wages and enterprise bargaining agreements (EBAs), as well as individual arrangements.

Private sector wages rose 1.2% on the quarter, but were up by 0.6% for the public sector.

GBP/AUD daily

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Looking ahead, the RBA will have to contend with yet higher wages, according to ANZ's predictions.

"RBA liaison indicates around two-thirds of firms expect wages growth of 3-5% over the coming quarters and a tenth expect wages to grow above 5%. Given firms' wage-setting intentions and the tight labour market, we expect WPI to accelerate further," says Dunk.

However, despite the upward surprise, economists are of the view that Australia is not facing a wage-price spiral, and this could yet allow the RBA to stick to its plan to end its rate-hiking cycle early in 2023.

"Consistent with the RBA’s Statement on Monetary Policy, we do not see a high risk of a price-wage spiral evolving," says Dunk.

Economists at Commonwealth Bank of Australia (CBA) say the data show that Australia is not facing a wage-price spiral like other jurisdictions and they continue to expect one more rate hike by the RBA, which would take the cash rate to 3.1%

Markets are pricing a peak in the RBA's base rate near 3.8%.

"AUD can fall if market participants unwind hike expectations in line with our view," says foreign exchange strategist Kim Mundy at CBA.

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