The most generous pay rises for Australia’s lowest-paid workers in three years - including a 6 per cent boost for those on the minimum wage - now risks sparking two more interest rate rises by Christmas that would see borrowing costs soar to the highest level since 2008.

AMP has issued a fresh warning about a wage-price spiral worsening inflation while employers are worried about business closures after the Fair Work Commission granted increases to award wages and the minimum wage that were both well above inflation.

Australia’s 2.7 million award-wage workers are receiving a 4.75 per cent pay rise that’s above inflation from July 1 - marking the most generous increase in three years.

The pay bump was above April’s inflation rate of 4.2 per cent and much better than last year’s increase of 3.5 per cent, marking the biggest increase since 2023 for those mainly working in food services, retail, healthcare and social assistance and administration and support service roles.

The national minimum wage is also rising during the next financial year by a more generous 6 per cent to $1004.90 a week or $26.44 an hour under industrial classification changes, with their annual full-time pay of $52,255 in the same 30 per cent marginal tax bracket for those earning up to $135,000.

This was the most generous increase since 2023 and was in line with a submission from the Australian Council of Trade Unions.

Employment Minister Amanda Rishworth welcomed the increase, taking the minimum weekly, full-time pay above $1000 a week for the first time.

“This represents a real wage increase, supporting workers with cost-of-living pressures,” Ms Rishworth told reporters in Canberra on Tuesday.

“They were the lowest-paid workers and have been hit hardest by the war in the Middle East and the resulting inflationary pressures, particularly in non-discretionary items like fuel and food.”

Treasurer Jim Chalmers was also effusive of the decision, despite the inflationary risks.

“This is the pay rise that millions of Australian workers need and deserve,” he said.

“This is the sustainable, real wage increase that the Government has called for and we’re pleased to see it delivered in today’s decision.”

“When it comes to these cost-of-living pressures, that Australians are confronting right now, we see decent pay as part of the solution, not part of the problem.”

The entry-level wage of $978.10 a week or $25.70 an hour will apply for new staff for no more than six months and is expected to affect 100,000 of the very lowest-paid workers.

The annual wage review decision affects 21.1 per cent of the Australian labour force or 2.8 million workers, including 2.7 million staff employed under a modern award.

AMP has now updated its forecasts to have two more Reserve Bank rate hikes by November, that would take the cash rate to an 18-year high of 4.85 per cent as higher wage costs worsened inflation.

“The Fair Work Commission announced a larger-than-inflation wage increase, which will directly impact more than 10 per cent of the national wage bill and potentially add upward pressures to wages across the broader Australian labour market,” economist My Bui said.

“The risk is that wage pressures spill over into other parts of the private sector.”

Fair Work Commission president Adam Hatcher said the lowest paid had been suffering cuts in real wages since the end of the pandemic in 2022 as inflation soared before price pressures returned late last year ahead of the Middle East conflict.

“We consider we should at least ensure that modern award reliant employees generally are not worse off in real terms than they were as at 1 July, 2025,” he said from the bench on Tuesday morning.

“We should also take additional measures to protect the position of the very lowest paid workers under modern awards.”

He expected the Reserve Bank’s three interest rate rises this year to slow the economy as inflation remained high, noting the gap between the consumer price index and modern awards “has particularly affected the living standards of the low paid and the capacity to meet their needs”.

“On top of this, the Australian economy faces the wildcard of the Middle East conflict,” Justice Hatcher said.

“This has added uncertainty as to the trajectory of the economy at least in the near future.

“A fundamental consideration that 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.”

But the industrial umpire rejected a call from unions for catch-up minimum pay increases to make up for cuts in real wages during several years of high inflation.

“We have concluded regrettably that it would not be practicable or responsible in the current uncertain circumstances to award a real wage increase for employees reliant on modern award wage rates that would be sufficient to close the real wage gap entirely,” Justice Hatcher said.

The Australian Chamber of Commerce and Industry had recommended a 3.5 per cent increase that was lagging inflation even before the Iran war sparked an oil crisis, and calculated this latest decision would cost the economy $11.7 billion.

“For businesses that are already struggling with interest rate hikes, high inflation and high fuel prices, this decision putting up wage costs will only add to the burden,” ACCI’s chief of policy and advocacy David Alexander said.

”For some small businesses, this will be too much to bear. For others, they’ll wear it themselves. It could be the tipping point for some businesses. Others will scale back their investment intentions.”

The Australian Retail Council warned the big increases would significantly increase labour costs for employers battling challenging trading conditions.

“Labour is one of the largest costs in running a retail business. Combined with rising energy, rent, insurance, freight, compliance and security costs, this decision will place additional strain on already thin margins across the sector,” the group’s chief legal and industrial relations officer Lindsay Carroll said.

But the Shop, Distributive and Allied Employees Association - the union representing retail workers - was disappointed award wage workers weren’t given a bigger increase to account for Reserve Bank expectations of inflation hitting a three-year high of 4.8 per cent by mid-year.

“The union is disappointed that unlike last year the Commission could not see its way clear to grant a real wage increase, except for the very lowest paid and new workforce entrants, at a time when workers are facing protracted cost of living pressures,” SDA national secretary Gerard Dwyer said.