Surprise wages reveal could hint at early interest rate relief

Wednesday, 25 December 2024 09:22

One of the major drivers of high interest rates may not be as forceful as it looks.

The prospect of imminent interest rate relief has been repeatedly watered down by the Reserve Bank, but the minutes from their most recent meeting show that one major factor working against a cut may actually be heading in the right direction.

Earlier this month, the RBA opted to keep the cash rate on hold at 4.35 per cent, where it has been since November 2023.

Many economic experts predicted the first rate cut may not come until May next year, or even later.

However, the board's minutes from the December 9-10 meeting reveal that the labour market may not be as tight as recent joblessness figures suggested.

The low unemployment rate has been one of the main drivers of high interest rates. Unemployment fell to 3.9 per cent in November, defying market expectations of an increase.

Despite this, the RBA board noted in its minutes that wage growth has softened more than expected - indicating there might be less demand for workers than otherwise indicated.

"The information received since the previous meeting confirmed that wages growth had slowed and that this had occurred faster than expected," the minutes read.

"A number of indicators of labour market conditions had strengthened or stabilised over preceding months.

"However, employment growth in the market sector had been weak and hiring intentions in the private sector were below average."

Overall, the board judged that their confidence inflation would reduce according to their current timeline had increased - but it was too early to say for sure.

This was also reflected earlier this month in RBA Governor Michele Bullock's post-meeting statement.

"Our forecasts do see inflation coming back down gradually over the next year. As each quarter goes by, and our forecasts look like they're basically in line with our forecasts, then that gives us a little bit more confidence in the future," she said.

It's too early to say if this means there is an increased possibility of an early rate cut in 2025, but it could indicate the RBA might feel more justified in doing so, particularly if wages data continues the recent trend.

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