The minutes of the Reserve Bank's June 4 board meeting not merely opened the way to another interest rate cut to 1% -- and quite possibly below that -- in coming months, they flagged that workers will not be escaping the rut of stagnant wages any time soon. And the bank really doesn't understand why.
The bank is increasingly pre-occupied with something neither it nor central banks around the world can explain: why wages growth remains sluggish even at low levels -- sometimes extremely low levels -- of unemployment, and why there hasn’t been an outbreak of inflation, as economic textbooks insist there must. The phrase the bank keeps coming back to is "spare capacity", and it was the subject of a major discussion at the board meeting -- and probably drove the rate cut decision:
Members had a detailed discussion of spare capacity in the labour market. Although difficult to measure directly, the extent of spare capacity in the labour market is an important factor that affects wages growth and price inflation. On a number of measures, it was apparent that the labour market still had significant spare capacity. The main approach to measuring spare capacity is to compare the current unemployment rate with an estimate of the unemployment rate associated with full employment, which is the rate of unemployment consistent with stable inflation. The Bank’s estimate of this unemployment rate had declined gradually over recent years, to be around 4½ per cent currently.