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Pay rise could put pressure on interest rates warn experts

Do you want the good news or the bad news?

Well, the good news is; with an ever tightening labour market, wages are tipped to rise over the coming months.

What the bad news? Experts are predicting that with a rise in wages we will see interest rates once again start to climb.

According to an article in The Australian, 1.4 million workers on award wages were recently given an early Christmas bonus by Fair Work Australia’s Geoffrey Giudice, who kindly handed them a 3.4 per cent pay rise that equates to between $19.40 and $38 per week.

This generous move by Giduice, along with the current mining boom that risks putting upward pressure on wages for all Australian workers, has Reserve Bank governor Glenn Stevens worried and many are predicting that the RBA will move on interest rates sooner than later as a result.

Some are suggesting a rate hike could occur as early as July or August if the central bank decides to move to keep inflation in check and prevent it from rising beyond its 2 to 3 per cent target zone. Of course this would all but negate Giudice’s award wage rise for many, as higher mortgage repayments make a further dent in the family coffers.

All of this might seem a little surprising, given that we saw a 1.2 per cent contraction in the March quarter GDP which sent many into a tale spin with talk of a possible recession should this occur again in the June quarter.

But it’s largely due to the FWA’s take on the economic climate of the day, with them stating, “The economy is performing reasonably well, labour productivity is growing, the profit share remains at historically high levels and underlying inflation is well within the RBA’s medium-term target band. Employment is growing, unemployment is reducing and labour participation remains high.”

Of course the RBA sees a significant increase in award wages as a threat, with the potential to put upward pressure on labour costs and therefore inflation. The central bank has warned that last quarter’s contraction represents a bottoming out of inflation and that the overall economy will once again pick up as damage caused by Queensland’s spate of natural disasters earlier this year is cleaned up.

In fact, some are suggesting that the economy could rebound by around 2 per cent in the June quarter, particularly given the looming mining and energy boom thanks to the growing economies of China and India.

While the FWA is aiming to lift what already is one of the world’s highest minimum wage floors and seeking to impose a reinforced award system, experts say this type of general wages policy, combined with mining industry pay hikes, threatens to place wage pressures on the wider Australian economy.

And that will put more pressure on the Reserve Bank’s blunt interest rate weapon to contain the inflation fallout.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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