Australia Raises Minimum Wage 5.75%, Boosting Rate-Hike Pressure

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(Bloomberg) — An Australian industrial relations ruling raised the national minimum wage by 5.75% in an effort to support lower-paid workers, a decision that boosted chances of an interest rate hike as soon as next week.

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In Friday’s decision, Justice Adam Hatcher, chair of the Fair Work Commission, said the new minimum would be 882.80 Australian dollars ($580.53) per week, or 23.23 Australian dollars per hour, from 1 July. The result, he said, “will not have significant macroeconomic effects”.

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However, it prompted the Royal Bank of Canada’s chief economist, Sue Lin Aung, to predict that the Reserve Bank would rise on Tuesday and into July with a final interest rate of 4.35%, up from its previous view that the current 3.85% was the peak.

“Today’s minimum wage decision adds to an already difficult labor cost picture,” she said. “A very tight labor market, rising wages, and higher unit labor costs are more compelling policy considerations, and by the Bank’s own admission, the current cash rate is not overly constrained. It should move higher.”

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The Australian dollar rallied, after initially erasing intraday gains following the decision, as government bond yields rose as traders priced in the possibility of the RBA extending the tightening cycle. Swaps traders see a 58% chance that the bank will raise interest rates at Tuesday’s meeting, up from a one-in-four chance on Thursday, according to data compiled by Bloomberg.

The Reserve Bank of Australia has raised interest rates 11 times since May 2022 as it tries to cool consumer rates, which are at around 7%. A hotter-than-expected monthly inflation report this week prompted ANZ Group Holdings Ltd. on Friday to raise its expected final interest rate to 4.35%, followed a little later by RBC.

The Workers Federation of Australia welcomed today’s wage decision, saying businesses can afford the increase.

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“It’s clear we don’t have a downward spiral between wages and price,” said Sally McManus, secretary of the Australian Council of Trade Unions. “Increases in the minimum wage over the past 20 years have not had an appreciable effect on inflation.”

The result of 5.75% was higher than the 3.7% recorded in the annual wage price index for the first quarter. But it fell short of some economists’ expectations for a 7% increase – in line with first-quarter consumer price index – and compares with the government’s target that “real wages for low-wage workers in Australia are not falling.”

RBC’s Ong said the 5.75% increase in award-related wages would add 0.4-0.5 percentage point to the wage price index in the third quarter, putting it above the RBA’s forecast of 4%. The central bank is increasingly concerned about the lack of productivity growth to offset some of the wage increases.

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The annual review is conducted by a panel of experts who determine the minimum wage each financial year based on reports submitted by employer groups, unions and governments. Today’s decision directly affects up to 2.37 million workers, or 20.5% of the workforce, Hatcher said.

“We place a great deal of weight on the impact of the current rate of inflation on the ability of staff relying on recent awards to meet their basic financial needs,” Hatcher said. “Inflation reduces the real value of these employees’ incomes and causes financial stress for families.”

Australian unemployment currently hovers near a decade low of 3.7%.

“We also took into account the recent strength of the labor market, and the fact that increases to modern minimum wage rates would provide a disproportionate benefit to female workers and may contribute to a narrowing of the overall gender wage gap across the entire employee workforce.”

With help from Michael J. Wilson and Matthew Burgess.

(Adds the reaction of the market, comments of economists, the head of the syndicate.)