RBA: Wage growth is the key - Wells Fargo

Analysts from Wells Fargo, “are not terribly concerned” by the miss in this week’s GDP report, as the drags from trade and business spending will likely prove temporary. They expect the RBA to keep rates on hold until wage inflation shows up. 

Key Quotes: 

“The Australian economy expanded just 0.4 percent (not annualized) in the fourth quarter, slightly below market expectations of 0.5 percent. It bears noting that growth in the prior quarter was revised marginally higher, so the growth in the fourth quarter was coming off a slightly higher base. Temporary trade dynamics and weakness in business investment are much to blame for the softness of fourth quarter growth. Domestic demand was actually quite strong over the period, reflecting gradual growth in the labor market and perhaps suggesting stability from consumer spending ahead.”

“The unemployment rate has trended lower, even as labor force participation approaches a record high. Despite these improvements in the labor market, wage growth remains modest…at least for now. There is a growing perception that improvement in the labor market will inevitably translate into higher wages.”

“As was widely expected, the RBA held its key lending rate unchanged at 1.50 percent. We expect the RBA to stay on hold, as it remains clear that policymakers are content with current economic conditions. The language in the policy statement continues to emphasize improving global dynamics, without implying a particularly hawkish stance. Our baseline expectation is that the RBA will continue to remain on hold, before eventually joining other global central banks in normalizing policy later this year with an eventual rate hike. The key is whether or not the elusive wage growth materializes.”