Wages are on the rise, sparking fears of near-term rate hikes.
On Tuesday, the Fair Work Commission (FWC) lifted Australia's minimum wage by 5.97%, with award-reliant workers set to receive a 4.75% increase, starting 1 July. That's higher than many economists had predicted in the FWC's annual wage review. It lifts the national minimum wage to $26.44 an hour, up from $24.95, or just over $1,000 a week.
The regulator acknowledged that the decision to increase wages was difficult, amid an "unusual degree of complexity" in the current market — citing inflationary pressures, higher interest rates, the conflict in the Middle East and higher oil prices globally — but added that many workers still need help catching up after years of elevated inflationary pressures.
"A fundamental consideration which must be balanced against these matters is that most modern award-reliant employees are still in the position that their wage rates, in real terms, remain lower than what they were in July 2021, prior to the post-pandemic spike in inflation," according to the FWC's decision. "The ‘real wage gap’ which has opened between the rate of the [consumer price index] and modern award wage rates has particularly affected the living standards of the low-paid and their capacity to meet their needs."
But larger wage increases can also raise costs for businesses and potentially add to inflation. Unions welcomed the decision, while business groups warned it will increase pressure on employers and may force some to lift prices to protect margins.
The Reserve Bank of Australia (RBA) has already increased the official cash rate (OCR) three times in 2026, bringing the current rate to 4.35%. On top of that, the most recent consumer price index (CPI) revealed that both headline inflation and trimmed mean remain elevated above the RBA's target band of 2% to 3%.
Some market players are now concerned that higher hourly wages could push the RBA to increase rates again.
Speaking at a Committee for Economic Development of Australia (CEDA) event in Melbourne, RBA Monetary Policy Board member Ian Harper said inflation has been a persistent issue well before the conflict in the Middle East, and is likely to remain a challenge in Australia for some time.
"We expect inflation to be with us for a while," he said. "Long-term inflation, for the first time in a long while, looks like it is now expected to be higher than it has been.
"You can see from the bank’s forecasts that we’re not expecting the underlying rate of inflation to [not] be back into the target band until 2027 and not back to the midpoint until 2028,” Harper added.
But not everyone shares the same level of concern.
Belinda Allen, head of Australian economics at Commonwealth Bank of Australia (CBA), told Australian Broker that the increase in the hourly minimum wage "does not shift our broader view.
"We do, already, have inflation pressures in the Australian economy. So the decision [to raise the minimum wage] came at a complicated time," Allen explained. "What we're seeing offshore is less conflict pushing inflation higher, [along with] elevated domestic inflationary pressures and concerns around inflation expectations. Obviously, the challenge whenever we see wages lift — be it through lifts in minimum and award wages, or be it lifts in individual agreements — at a time where we're already seeing high inflation, that can be a challenge where we do see inflation expectations reset."
The economist added that the wage increase was inline with expectations.
"So we haven't made any major changes to our [broader market] view based on the decision," she said.
Adam Boyton, head of Australian economics, over at ANZ, agreed that the FWC decision won't "materially alter" the outlook for wages, inflation and the nation's benchmark cash rate.
"The bulk of the wages bill comes from individual and collective arrangements," Boyton said. "We expect the softer activity outlook and the increase in the unemployment rate to provide an offset to the FWC’s decision when it comes to the aggregate wages bill."
All four of Australia's Big Four banks are forecasting at hold at the RBA's June meeting.
In the case of CBA, Allen said: "We don't have any more interest rate hikes on our forecast. We do think the RBA is done. We definitely don't think there's a chance of a shift in June.
"And we also don't think they'll move in August," she added. "Given by the time August comes around, we should see more evidence that the Australian economy is slowing and the RBA will be able to sit on the sidelines."
The RBA's next meeting on monetary policy is scheduled for the 15 to 16 of June.
