Reserve Bank still on track to cut rates

Stronger than expected wages growth released this week is unlikely to stop the Reserve Bank from starting to cut rates. Data released on Wednesday from the Australian Bureau of Statistics showed that wages increased by 1.2 per cent during the June quarter, which is marginally higher than the market’s forecasts of 1.0 per cent.

These figures represent 4.2 per cent on an annual basis, which is slightly higher than market forecasts of 4.1 per cent. The wages data is based on total hourly rates of pay, excluding bonuses.

Market commentators suggest that although these numbers are slightly higher than expected, they’re not strong enough to make the Bank change its recent decision to ease monetary policy. Economists believe that the annual wages data would need to be as high as 4.5 per cent for the Reserve Bank to be concerned.

News on the timing and size of the RBA’s next move won’t be available until its meeting on September 2. The market seems divided about whether the RBA will cut rates at this meeting or wait until November.

RBA Deputy Governor Ric Battellino was reported to have told a parliamentary inquiry into the banking sector this week that the Bank is comfortable moving to cut rates before inflation has moderated. The Bank will continue to watch for signs of inflationary pressures caused by the Federal Government’s July income tax cuts and any stimulatory effects from the stronger terms of trade.

Some pundits suggest that Governor Glenn Stevens will want to see the consumer price index data for the September quarter which is not due out until October 22. There is also mixed opinion about whether the first cut will be 25 or 50 basis points. Many are predicting 25 points in November and then another 25 points in February 2009.

Infochoice.com.au