The Governor formally waived the guideline in 2021 that rates would not increase until the Wage Price Index increased by 3%. It now refers to a broader measure of labor costs that does not have a specific numeric trigger. The tragedy in Ukraine added uncertainty and supported the theme of “patience”.

As expected, the Reserve Bank Board decided to keep the exchange rate at 10 basis points.

Two interesting points emerged from the Governor’s policy statement.

First, he extended the measurement of wage costs from “aggregate wage growth” to “wage costs”.

Second, it included an assessment of the economic impact of the war in Ukraine.

In the key last paragraph, the condition around wages is “it will likely take some time before labor cost growth reaches a rate consistent with inflation being sustainably on target.”

Contrast that with February’s statement, “it will likely take some time before aggregate wage growth reaches a rate consistent with inflation sustainably on target.”

“Overall wage growth” is the term used by the RBA for the wage price index. Through 2021, in a number of speeches, the Governor has spoken of the need for the wage price index growth rate to reach 3% or more before raising the cash rate.

We argued that due to the strong inertia of the WPI (held back by corporate negotiations and the awarding of salaries which are both set for long periods with lags), the WPI does not pick up momentum timely salaries.

The annual growth rate of the WPI is also impacted by base effects as the growth of the index in the June quarter of last year was only 0.4%. This slowdown in the annual rate will persist until the June 2022 quarter which will be published on August 24.

We expect the March quarter WPI to rise 0.8%, bringing the annual rate to 2.5%, but we argued that the last two draws (0.7% and 0.8%) indicate a pace annualized over six months of 3.0% and, supplemented by other measures such as bonuses, overtime, company surveys, RBA linkage; turnover and the decade-low unemployment rate, there will be enough evidence to start the tightening cycle on August 2.

Explicit guidance in today’s statement, where the necessary earnings signals are broader than the WPI, reinforces our case for the August liftoff.

We continue to downplay earlier moves given the persistent “patient” theme and the Governor’s preference (appearance before the House Standing Committee, Feb. 12) to see two more IPCs.

This theme of “patience” is consistent with the Governor’s assessment of the tragedy in Ukraine. He notes that “the war in Ukraine is a major new source of uncertainty” and “the time it will take to resolve supply chain disruptions is a major source of uncertainty about the inflation outlook, as is the evolution of global energy markets.”

These issues are key to the RBA’s forecast that core inflation will decline to 2.75% in 2023, which will put some pressure on monetary policy.

Conclusion

We remain comfortable with our view that the first rate increase will take place at the August board meeting.

In today’s statement, the Governor released himself from the constraint that the spot rate will only increase when annual growth in the wage price index exceeds 3%.

There is also this air of caution around the war in Ukraine which perfectly feeds the concept of “patience” that the Governor confirms.

“The Board stands ready to be patient as it monitors developments in the various factors affecting inflation in Australia.”