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The Reserve Bank believes the jobs market has reached a turning point under the weight of its sharp increase in official interest rates, amid worrying signs home buyers are using up their savings to meet high mortgage repayments.
As new data showed wages growth matched inflation for the first time in three years, minutes of the RBA board’s most recent meeting – at which it held the cash rate steady at 4.1 per cent – revealed growing awareness that its aggressive tightening of monetary policy was hurting a growing proportion of the economy.
Minutes of the Reserve Bank’s most recent meeting show growing awareness of the economic hit caused by the rapid increase in official interest rates.Credit: Steven Siewert
The bank has increased official interest rates by 4 percentage points since May last year as it battles to bring down inflation. It is expecting economic growth to slow to just 0.9 per cent this year. Unemployment is tipped to hit 4.5 per cent by the end of 2024.
Twice in the minutes the bank noted there appeared to be a turning point in the jobs market, which has remained robust in the past year. Unemployment has remained about 3.5 per cent.
“There were some signs that the labour market was at a turning point, including a small rise in the underemployment rate,” the minutes show.
“More generally, members noted signs that the substantial rise in interest rates over the prior year was constraining demand, including in the retail sector, where the value of sales had not grown for some time.
“Consumption had already slowed significantly, there were early signs that the labour market might be at a turning point and inflation was heading in the right direction.”
It is the first time since the RBA started tightening monetary policy that it noted a possible turning point in the jobs market.
Over the past two years, the bank and federal Treasury have noted the large amount of money stored away from home buyers in savings accounts or mortgage redraw accounts. The minutes show the RBA has noticed this is changing as mortgagors are forced to make larger repayments.
“Voluntary principal payments into borrowers’ offset and redraw accounts declined in the June quarter,” the minutes show.
“Net flows into these accounts had declined to be noticeably lower than the pre-pandemic average, consistent with pressures on disposable incomes.”
Separate data from the Australian Bureau of Statistics confirmed that despite wage growth picking up, it was not picking up as quickly as feared by the Reserve Bank.
The wage price index lifted by a less-than-expected 0.8 per cent in the June quarter, matching the quarterly inflation rate for the same period. It is the first time since mid-2020 that wages have at least kept pace with inflation.
Markets, economists and the Reserve Bank all expected a quarterly result of at least 0.9 per cent. It was the third consecutive quarter of growth at 0.8 per cent.
At an annual rate, wages growth slowed marginally to 3.6 per cent from 3.7 per cent in the 12 months to March. Over the past year, inflation has climbed by 6 per cent.
About 12 per cent of people in the private sector enjoyed a wage increase in the quarter, down from 14 per cent in the same quarter a year ago. But those people enjoyed a wage lift of 4.5 per cent, the largest increase since before the global financial crisis in 2008-09.
About 1.5 per cent of people received a wage increase of more than 6 per cent, up from 1 per cent a year ago. The number of people getting small wage increases fell, with 2.3 per cent receiving less than 2 per cent.
These figures pre-date the latest increase in the minimum wage. The nation’s lowest-paid workers received a pay rise of 5.75 per cent from the start of July.
Betashares chief economist David Bassanese, who tipped the RBA would start cutting rates in April next year, said unemployment may not have to lift as much as feared to keep inflation in check.
The RBA forecasts the jobless rate to rise to about 4.5 per cent by the end of next year as the economy slows under the weight of its interest rate increases.
Bassanese said due to economic growth and inflation moderating, higher immigration filling shortages in the jobs market and wages growth remaining under control, the RBA may be able to loosen monetary policy.
“Provided overall inflation keeps moderating, Australia may not need to suffer an extended period of below-trend growth and so risk an outright recession,” he said.
“The unemployment rate consistent with inflation returning to target could be much less than the 4.5 per cent rate currently assumed by the RBA.”
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