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Slower wage growth gives RBA room to move

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AAP

2013-02-20

A slowdown in wages growth will help keep inflation in check and give the Reserve Bank of Australia room to cut the cash rate further in 2013.

But economists say weaker wages growth and a benign inflation outlook doesn't guarantee further rate cuts.

Figures released by the Australian Bureau of Statistics show wages rose 0.8 per cent, seasonally adjusted, in the final three months of 2012 and were up 3.4 per cent over the year.

That's down from 3.7 per cent annual growth in the 12 months to September.

National Australia Bank chief economist, markets, Rob Henderson said the slower wage growth would give the RBA room to cut the cash rate if necessary.

"I think it's now clear that wages growth has eased quite considerably and this underpins a good outlook for inflation ahead," he said.

"So, in turn, that kind of means that the RBA's already stated view that the door is wide open to cut interest rates if they need to is reinforced by this."

The RBA has previously indicated it can tolerate wage growth above four per cent, which would be consistent with inflation of around 2.5 per cent, once adjusted for productivity growth.

It expects inflation to remain within its annual target range of two to three per cent for the next two years.

But Mr Henderson said a benign inflation outlook and restrained wages growth would not, on their own, be enough to prompt the RBA to cut again.

He said the central bank was waiting to see whether its previous interest rate cuts would be enough to boost underperforming sectors like housing construction.

"It's not inflation which is stopping the RBA from cutting at the moment, it's the expectation that they have done enough to boost growth," Mr Henderson said.

The RBA cut the cash rate 1.75 percentage points between November 2011 and December 2012 but kept it on hold at three per cent at its February board meeting.

JP Morgan economist Ben Jarman said the ABS figures showed wages growth had fallen to its lowest level since the global financial crisis.

"Outside of the window that incorporated the post-Lehman crisis and labour market slowdown, this is the weakest pace of overall wage growth in a decade," he said.

Mr Jarman said a sharp decline in wages growth in the mining sector was a sign demand for workers had eased in the industry.

He said wages growth in the sector slowed from 1.8 per cent in the first half of 2012 to 0.7 per cent in the second half.

"It is not unusual for wage growth to slow in the second half of the year, but last year's slide is substantially greater than normal," he said.

"This syncs with the slowdown in mining sector employment that has played out as the run-rate of investment project starts has tapered off."

Evan Schwarten