Wages no threat to inflation and rates

This week has only reinforced the view that the interest cycle has hit bottom and that the economy is moving into a phase where the Reserve bank will be considering rate rises. That’s not to say rises are imminent however and the latest wage figures support this. A speech by Reserve Bank Deputy Governor Glenn Stevens reiterated the sentiments of the previous week’s monetary policy statement in saying that the outlook for Australian growth continues to improve as the prospects for a global recovery firm. The balance of risks are no longer tilted towards the downside, he said. The signs of US recovery are still tentative at best but consumer spending remains healthy and there few negative indicators emerging at the moment. In Australia, the latest wage figures bolster the RBA’s argument that inflation is not a cause for too much worry, thus not adding to any argument for raising rates. The Wage Cost Index rose by 0.7 per cent to 3.4 per cent in the December quarter. This was in line with market expectations and well within the Reserve Bank's comfort limit of 4.5 per cent. So the conditions that would lead to a climate of rising interest rates appear to be building at this stage, there is certainly no stand out case for a rise just yet. Mid to late 2002 still seems the more likely timing of the first upward move.