Flat wage growth takes toll on spending

The Reserve Bank is widely expected to keep the cash rate steady at a record-low 1.5 per cent when its board meets on Tuesday.

Flat wage growth, and its toll on spending, is creating another reason for the Reserve Bank to sit tight on interest rates despite rampant house prices in Sydney and Melbourne.

New figures show retail spending declined 0.1 per cent in February with the household and clothing retailing sectors especially weak.

Annual retailing growth at 2.7 per cent is the lowest since mid-2013 and well below the 10-year average of 4.3 per cent.

Commonwealth Bank senior economist Michael Workman says with annual household earnings running about the rate of inflation there is no growth in spending power.

Australian Retailers Association executive director Russell Zimmerman said the result was disappointing, but he is confident about the outlook following the passing of tax cuts for businesses with turnover up to $50 million by parliament last Friday.

"Although we are experiencing a cooling off period in retail sales, we are confident that the reduction in the company tax rate ... will benefit hundreds of thousands of small and medium-sized businesses, their employees and the broader Australian community," Mr Zimmerman said.

The retail result comes despite the wealth effect of rising housing prices.

The CoreLogic Home Value Index of capital city home prices rose by 1.4 per cent in March and was up 12.9 per cent over the year.

Sydney prices were up 18.9 per cent annually, followed by Melbourne rising 15.9 per cent.

Timo Henckel, a lecturer at the Australian National University's Research School of Economics, says elevated house prices and high household debt will continue to weigh on the Reserve Bank's mind given the risk of a painful price correction.

"All its implications for the macro economy cannot be easily dismissed," he says.

The banking watchdog, the Australian Prudential Regulation Authority, was forced to announce a further suite of measures on Friday in an attempt to curb the rising financial risks in the housing market, including limiting interest-only property lending to 30 per cent of new loans.

Dr Henckel says the decision by major banks to independently raise their mortgage lending rates will also give the Reserve Bank more reason to hold fire on changing the official cash rate when the board meets on Tuesday.

Since its last gathering, the unemployment rate has edged up to 5.9 per cent, while inflation at this stage remains subdued.

Dr Henckel chairs the ANU's so-called "RBA shadow board", made up of academics, economists and former RBA board members.

"The RBA shadow board remains convinced that the cash rate should remain at its current level," Dr Henckel said.

The central bank last cut the cash rate in August 2016 to a record-low 1.5 per cent.

Source AAP

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