Two revelations in the last week confirm that the Reserve Bank is on the wrong track with its unremitting interest rate hikes, risking an Australian recession for no good reason.
First up were Wednesday’s wage growth numbers for the December quarter that came in below market expectations.
Second was the revelation the same day by home affairs minister, Clare O’Neil, that while the annual net number of skilled permanent migrants coming to Australia since 2005 has remained almost constant at around 30,000, the number of temporary migrants arriving since 2007 has nearly doubled from one million to 1.9 million.
And only 6 per cent of those temporary migrants are on skilled visas.
Now the true picture is emerging. Australia’s immigration program has been overwhelmingly tilted to unskilled temporary migrants, who are heavily dependent on the goodwill of their sponsors.
Yet in lifting interest rates at each of its last nine meetings, three of them supersized 50 basis point increases, the Reserve Bank Board says it is fearful of a wage-price spiral and needs to go harder for longer.
Minutes of the Board’s February meeting recorded it considered “there were upside risks to wages growth and it was possible that inflation and wage expectations could move higher, which would make the task of bringing inflation down more difficult.”
So concerned was the Board with the Reserve Bank’s official outlook for wages that it contemplated a 50 basis point cash rate increase. But it settled on a 25 basis point increase, while the Board “agreed that further increases in interest rates are likely to be needed over the months ahead.”
There you have it: fears of a wage-price spiral have convinced the Reserve Bank Board that multiple further cash rate increases will be needed to prevent it.
History shows that the Reserve Bank consistently over-estimates wage rises, increasing interest rates or keeping them higher for longer to suppress a mythical wages breakout.
After Australia successfully navigated the Global Financial Crisis and, unlike most advanced countries, avoided a recession, the Reserve Bank repeatedly got its wage forecasts wrong, predicting a wages breakout.
How do we know? The Reserve Bank itself told us. A Reserve Bank report published in 2017 features a chart showing that in each of the previous seven years it had massively over-forecast wage increases.
Wouldn’t you think that having racked up seven years of huge forecasting errors the Reserve Bank would adjust its economic forecasting model and its thinking?
Instead, when the reality diverged from the Reserve Bank’s models year after year after year, the Bank seems to have concluded that reality must be wrong because its model is right.
Undeterred by reality to this day, the Reserve Bank persists in forecasting wage increases well above those that are occurring, warning in its February statement on monetary policy of a “price-wage spiral”.
The Reserve Bank should not be surprised that there has been no wages breakout. Many of Australia’s 1.9 million temporary visa holders are vulnerable to unlawful exploitation in industries such as agriculture, hospitality, and retailing.
This puts downward pressure not only on their wages but also on the wages of citizens and permanent residents who compete with them for work.
Has this variable been included in the Reserve Bank’s flawed wage forecasting model?
As the then-finance minister said candidly in 2019, low wage growth was a deliberate design feature of the Coalition government’s economic architecture.
Last year the McKell Institute analysed the causes of low wage growth, finding further contributors included federal government support for a reduction in penalty rates, federal government inaction on wage theft, federal government opposition to increases in the minimum wage, and public sector wage freezes.
Mindful of the global recession of 2008 and the uncertain economic outlook since then, employers have been, quite rationally, offering bonuses and other one-off payments to attract and retain staff, in lieu of permanent, baked-in wage rises.
These temporary payments can be readily halted if necessary.
Each of these dynamics places downward pressure on wages.
The lags in the existing tightening of monetary policy, including the 800,000 home loans totalling $350 billion that this year will fall off a low fixed rate to a much higher variable rate, mean that more contraction is to come from the existing monetary policy stance.
Yet the Reserve Bank has stated that further multiple cash rate increases are on the way.
By seeking to suppress an imaginary wage-price spiral – as it has sought to do so many times in the last decade – the Reserve Bank is at grave risk of inflicting an unnecessary recession on Australia.
Craig Emerson is managing director of Emerson Economics. He is director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and adjunct professor at Victoria University’s College of Business. He is also chair of the McKell Institute.