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By HaleStewart June 30, 2014 2:14 pm
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Australian Decision Preview: No Change; Inflationary Pressures Are Contained

     Tomorrow, the Reserve Bank of Australia will meet, with the most likely outcome being a “stand pat” at the current policy rate of 2.5%.  Below is a look at the previous Australian statement, along with some accompanying charts to show what the Bank is analyzing from a policy perspective.

From their latest minutes:

The wage price index rose by 0.7 per cent in the March quarter and by 2.6 per cent over the year. The year-ended pace of wage growth was 1 percentage point below its long-run average and around the slowest pace in the 17-year history of this series. Members noted that the decline in wage growth over the past 18 months or so was consistent with the increase in the unemployment rate over the same period. Business surveys and liaison suggested that wage pressures were likely to remain constrained over the year ahead.

The labour market had shown some signs of improvement. In April, employment increased to be almost 1 per cent higher since the end of 2013 and the unemployment rate remained steady. Forward-looking indicators had improved over the past year but remained at low levels, consistent with relatively moderate growth in employment over coming months.

Here, the bank is obviously looking at the potential for wage-based inflation.  They first note that labor costs increased at a low rate in the previous reading.  As this chart from the bank’s website shows, the Y/Y rate of change in this metric is declining and currently stands at very low historical levels:

     While the labor market has shown improvement, the unemployment rate is still near its highest levels in the last 5 years:

     Although the number of employees is still increasing, the number of hours worked is at best stable, indicating there is little to no increase in wages as a result of increased hours worked.

     Overall inflation is clearly under control:

     The Australian bond market obvioiusly does not think inflation is an issue either, as evidenced by their low interest rates:

At the same time, overall Australian growth is moderate.

     Even if the bank was thinking about raising rates, the high level of the Australian dollar might prevent that from happening:

    

     Overall, prices are clearly contained.  There is no threat of wage inflation.  And moderate growth indicates there is little to no fear of inflationary pressures from high growth levels. 

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

 

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