(Bloomberg) -- Australia’s industrial relations umpire raised the national minimum wage by 5.75% in an effort to support low-paid workers, a decision that boosted the chances of an interest-rate increase as soon as next week. 

The new minimum rate will be A$882.80 ($580.53) a week, or A$23.23 an hour, from July 1, Justice Adam Hatcher, president of the Fair Work Commission, said in Friday’s decision. He argued the result will “not have discernible macro-economic effects.” 

Yet it prompted Royal Bank of Canada Chief Economist Su-Lin Ong to predict the Reserve Bank will hike on Tuesday and in July for a terminal rate of 4.35%, up from her previous view that the current 3.85% was the peak.

“Today’s minimum wage decision adds to the already challenging labor cost picture,” she said. “The extremely tight labor market, rising wages and elevated unit labor costs are more pressing for policy consideration and by the bank’s own admission, the current cash rate is not overly restrictive. It needs to move higher.”

The Australian dollar, after initially erasing intraday gains following the decision, climbed with government bond yields as traders priced in the prospect of the RBA prolonging its tightening cycle. Swaps traders see a 58% chance the bank will raise the cash rate at Tuesday’s meeting, up from about a one-in-four chance on Thursday, according to data compiled by Bloomberg.

The RBA has lifted rates 11 times since May 2022 as it tries to cool consumer prices that are running at around 7%. A hotter-than-expected monthly inflation report this week prompted ANZ Group Holdings Ltd. on Friday to raise its forecast terminal rate to 4.35%, followed shortly after by RBC.

Australia’s peak labor union welcomed today’s wage decision, saying businesses can afford the increase. 

“We clearly do not have a wage-price spiral,” said Sally McManus, secretary of the Australian Council of Trade Unions. “Increases to the minimum wage over the past 20 years have had no discernible impact on inflation.”

The 5.75% result is higher than the 3.7% recorded in the annual wage price index for the first quarter. But it was below some economists’ expectations for a 7% rise — in line with first-quarter CPI — and compares with the government’s aim that “real wages of Australia’s low-paid workers do not go backwards.”

RBC’s Ong said the 5.75% increase for award-linked pay will add 0.4-0.5 percentage points to the wage price index in the third quarter, pushing it above the RBA’s 4% forecast. The central bank is increasingly concerned about a lack of productivity growth to offset some of the pay increases.

The annual review is conducted by a panel of experts who set the minimum wage each fiscal year based on submissions from employer groups, unions and governments. Today’s decision directly affects up to 2.37 million workers, or 20.5% of the labor force, Hatcher said.

“We have placed significant weight on the impact of the current rate of inflation on the ability of modern award-reliant employees to meet their basic financial needs,” Hatcher said. “Inflation is reducing the real value of these employees’ incomes and causing households financial stress.”

Australian unemployment is currently hovering near decade lows at 3.7%.

“We have also taken into account the recent robustness of the labor market, and the fact that increases to modern award minimum wage rates will provide a disproportionate benefit to female workers and may contribute to narrowing the aggregate gender pay gap across the entire employee workforce.” 

--With assistance from Michael G. Wilson and Matthew Burgess.

(Adds market’s reaction, comments from economists, union boss.)

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