;widows: 2;-webkit-text-stroke-width: 0px;text-decoration-thickness: initial;text-decoration-style: initial;text-decoration-color: initial;word-spacing:0px”>While business complains the international border closure is causing skills shortages, the RBA is seeing no firm evidence this is showing up in higher wages.
The economy continues to outperform expectations, but the Reserve Bank of Australia wants to be confident that this will show up in wages and inflation before dialling back its extraordinary monetary stimulus.
The monthly RBA board meeting statement by governor Philip Lowe added a new sentence: “There are reports of labour shortages in some parts of the economy.”
Yet while business complains about the international border closure causing skills shortages, the RBA is seeing no firm evidence so far that this is showing up in wages pressure.
Employers may be holding out for the relief valve of international borders reopening to get access to skilled labour, rather than permanently ratcheting up the cost base of their workforce.
Therein lies a dilemma for the RBA. It is seeing a rapidly improving labour market.
“Progress in reducing unemployment has been faster than expected, with the unemployment rate declining to 5.5 per cent in April,” Lowe noted.
“Job vacancies are at a high level and a further decline in the unemployment rate to around 5 per cent is expected by the end of this year.”
While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest.
— Philip Lowe, RBA governor
But the RBA is waiting for this to translate into higher wages and price pressures.
“Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued.
“While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest.”
Markets in a flap
The RBA was in a holding pattern at its Tuesday board meeting, no doubt narrowing down its policy options for its crucial July meeting.
Financial market traders went into a flurry of speculation over a tweak to the RBA’s language on its plans for the $200 billion quantitative easing program.
The RBA said it would “consider future bond purchases” beyond September, whereas last month the Reserve Bank said it was “prepared to undertake further bond purchases” to assist with progress towards the goals of full employment and inflation.
Some RBA watchers viewed the change as a dovish tilt to further $100 billion of bond purchases, whereas others viewed it as a hawkish signal on likely tapering.
Yet markets may have over-interpreted the change in language, which was probably not intended to convey a particular direction.
First, the RBA will decide next month whether to extend its 0.1 per cent yield curve target from April 2024 to November 2024.
Extending it would imply the RBA believes the 0.1 per cent overnight cash rate won’t rise until after 2024 – an arguably dovish tilt from its current guidance that a rate rise is “unlikely to be until 2024 at the earliest”.
For credibility reasons, the RBA would want to be fairly confident that the cash rate was not going to increase until after 2024.
While that’s possible, if the labour market continues to improve, it’s perhaps not a scenario the RBA can stake its credibility on.
Though finely balanced, extending the yield curve target seems a bit less likely.
Second, the RBA will decide the size of the third tranche of its government bond-buying program beyond September.
The RBA is midway through buying $200 billion of bonds over the program’s initial 10 months to suppress long-term bond yields.
Bond buying to continue
Quantitative easing will continue in some shape or form.
The easiest option will be to add another $100 billion at the existing pace.
Another option is to introduce some flexibility to the $5 billion weekly bond purchases. The RBA has historically liked to have flexibility on monetary policy.
The final option is a smaller amount of bond purchases over the next five months.
The RBA will have noticed other central banks in Canada and New Zealand signalling policy tightening well before 2024.
Yet Canada is already around its 2 per cent inflation target and New Zealand unemployment is a low 4.7 per cent.
In Australia, the weakness in prices and wages is much more entrenched.
Hence, Lowe will want to do more, it’s just a matter of how much.
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