Slower Growth Gives The Reserve Bank Scope In Its Battle To Keep Lid On Costs

The Age

Thursday May 15, 2008

Vanessa Burrow, Markets Reporter

WAGES are going up surprisingly slowly, giving the Reserve Bank a breather in the war on inflation.

The wage price index, released yesterday, rose only 0.9% in the March quarter. For the year to March 31 it was up 4.1%. This means wages growth is lower than the inflation rate, which is at a 17-year high.

The latest consumer price index showed inflation above 4%, well above the RBA's comfort zone of 2% to 3%.

Excessive inflation would usually have spurred the RBA into action, but over the past two months it has left interest rates on hold because of signs the economy has been slowing.

Commonwealth Bank chief economist Michael Blythe said any surge in wages growth would have provided the trigger the RBA needed to lift interest rates to 7.5% from the current 7.25%.

The market yesterday discounted the chance of a rate rise, sending the dollar to US93.6? last night from more than US94.2? immediately before the wages data was released.

Lehman Brothers chief economist Stephen Roberts said in the past 20 years, governments had altered the way wages were set.

"It's so much harder for people to negotiate a pay rise these days," he said.

"And with the prospect that unemployment will rise, that probably will take some pressure out of the market too."

Handing down the budget on Tuesday, Treasurer Wayne Swan predicted that unemployment would rise from 4.2% to about 4.75% in 2008-09.

ABN Amro chief economist Kieran Davies said many factors were containing wages growth, including increased migration, better retention of older workers and cultural changes. "It's been the theme in the labour market for a long time that wages have been very well behaved," he said. "The labour market is a lot more flexible, and bargaining power has shifted away from the worker to the employer."

Mr Davies said it was unlikely the RBA would lower its guard in the fight against inflation. Pay deals, such as the one struck by Victorian teachers, would prevent wages growth from becoming a forgotten topic, he said.

The Australian Bureau of Statistics will release more data on weekly wages growth at 11.30am today.