Commodities, Wages Biggest Threats to Steady Rates

By Glenn Dyer | More Articles by Glenn Dyer

No rate change from the Reserve Bank ahead of today’s release of the March quarter National Accounts and GDP figures.

Governor Philip Lowe again said in a post meeting statement that the official cash rate would remain at 0.1%.

Good data yesterday saw economists raise their estimates of the March quarter’s growth rate from 1.1% to 1.4% and as much as 2.0%.

That will still be down from the 3.1% quarter on quarter growth in the December quarter.

But Tuesday’s statement from Dr Lowe made it clear it is what happens in the future that is important, not the historical data.

“The Board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target,” the final paragraph from Tuesday’s statement from Dr Lowe read

“It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest,” and that remains the RBA’s policy stance.

From that, wages remain the big question.

Both the government and the RBA estimate wages will be growing by around 2.25% in mid 2023 (the out year of current forecasts). That’s less than wages growth in 2018. The RBA wants it much higher.

The Wage Price Index was up 1.5% in the year to March, but the ABS also said on Tuesday that another measure of wages was up 2.7% in the year to March. But the latter is conflated with payments like JobKeeper and the wages data in today’s National Accounts will also be hard to untangle from subsidies and changes to hours and work patterns.

The question now is whether the sentiments in that statement can trump the reality of what is happening in the economy – not only at the July policy meeting, but as we get closer to 2024.

Covid remains a major concern here and offshore.

While Dr Lowe said the economy was recovering more quickly from the coronavirus pandemic than had been expected, thanks to the very low interest rates and government support, further Covid outbreaks remain a concern.

The current Victorian lockdowns reminds us of that as do surges in parts of Southern China, Thailand, Singapore, Malaysia, Japan, warnings about looming new waves in the UK and continuing infections in parts of Europe,

Dr Lowe said this was important ongoing source of uncertainty, although this should diminish as more of the population is vaccinated.”

He added that the jobs market was also improving faster than forecast and there were reports of labour shortages in some parts of the economy. Despite that, inflation and wage pressures remained subdued (which will be a worry if it persists and instances of job shortages increase).

The only area of high price growth was the housing sector, which Dr Lowe said the bank was watching (See separate story on house prices in May and building approvals for April).

Tuesday’s statement did omit a key phrase from the Governor’s May Statement:

That was; “the Board is prepared to undertake further bond purchases to assist with progress towards the goals of full employment and inflation”.  This was a commitment that the bank would continue its quantitative easing for longer than expected to help the economy rebound.

The omission suggests greater confidence in Marin Place in the economic outlook but may also reflect the steadying in bond yields since in the past three months where the 10-year bond yield has steadied in line with movements offshore and the Aussie dollar has traded in a narrow range of 77 to 78 US cents. That is what the RBA’s buying of 10-year bonds was intended to do.

The $5 billion a month bond purchases will probably be tapered from later this year, starting with a 50% cut. That decision will come from the July meeting.


The influence of those record iron ore prices (see separate story) showed up in the Reserve Bank’s Commodity Price Index which surged to its second highest level ever in May, according to data from the central bank on Tuesday afternoon.

The index hit a reading of 121.9, second only to the 123.0 reading back in October 2008, the month after Lehman Brothers collapsed, commodity prices continued to surge and equities started their steep slide.

The index is up more than 16% since the end of 2020.

The drivers have of course been higher iron ore prices plus rises in the prices of copper, thermal coal, lead and zinc, LNG and rural crops like wheat and canola.

In a commentary published on Tuesday with the graph the RBA said the index rose 5.8% (in a preliminary estimate) from April in Australian dollar terms (iron ore and copper prices hit all-time highs in the month and tin, nickel and zinc all hit 10-year highs).

The RBA said the rural, non-rural and base metals sub-indices all increased in the month.

Over the past year, the index has increased by 23.8% in Australian dollar terms.

It would have been much higher with the Australian dollar up around 15% since May 2020.

The RBA said that, using spot prices for iron ore, coking coal thermal coal and LNG, the index was up close 9% in May.

Graph: RBA Index of Commodity Prices


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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