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Wages growth too slow for rates to rise: RBA

Jonathan Shapiro
Jonathan ShapiroSenior reporter

Reserve Bank governor Phil Lowe says wage growth needed to be “materially” higher before the central bank would contemplate stepping back from its ultra loose monetary policy settings.

The comments made at The Australian Financial Review Business Summit are at odds with the bond market, which is testing the central bank’s commitment to holding the cash rate at its 0.1 per cent setting for the next three years.

The bond market, Dr Lowe, noted is pricing in a possible increase in the cash rate as early as late next year and then again in 2023, but he said this is not “an expectation that we share.”

For the bond market pricing to be right, he said, it would require inflation to be sustainably above the 2 to 3 per cent range and for wages growth would need to be sustainably above 3 per cent.

“The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time.”

“Predicting how long it will take is inherently difficult, so there is room for different views. But our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024.”

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Dr Lowe pointed out that wages growth is currently running at 1.4 per cent - “the lowest on record” - and was low heading into the pandemic.

“Then the pandemic resulted in a further step-down. This step-down means that we are a long way from a world in which wages growth is running at 3 per cent plus.”

“We continue to pay close attention to the forecasts, but we want to see actual inflation outcomes consistent with the target before moving the cash rate,” he said.

“For inflation to be sustainably within the 2 to 3 per cent target range, wages growth needs to be materially higher than it is currently. This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”

Dr Lowe said the Reserve Bank’s actions were about more than achieving a desired inflation rate above 2 per cent.

“It is just as much about achieving the maximum possible sustainable level of employment in Australia. Unemployment is a major economic and social problem and the board places a high priority on a return to full employment.”

Rising house prices a concern

In a wide-ranging speech Dr Lowe also weighed in on the housing market as property values have been boosted by low interest rates.

He conceded that high house prices “raised concern for many people” and noted that elevated house prices and stagnant wages were not a healthy combination.

He said the Reserve Bank did not target house prices but it and other regulators had other tools at their disposal, beyond hiking interest rates, such as tightening lending criteria to cap exuberance.

“Looser standards would increase medium-term risks and add to the upward pressure on prices, so would be of concern.

“Reflecting this, the Council of Financial Regulators has indicated that it would consider possible responses should lending standards deteriorate and financial risks increase.”

“We are not at this point, but we are watching carefully.”

Dr Lowe also lamented the lack of business investment but conceded there was “no magic ingredient.

“A durable recovery from the pandemic requires a strong and sustained pick-up in business investment.”

“Not only would this provide a needed boost to aggregate demand over the next couple of years, but it would also help build the capital stock that is needed to support future production.

“Stronger investment would also support a more productive workforce and a lift in both nominal and real wages.”

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Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate debt, private equity and investment banking. He is based in Sydney. Connect with Jonathan on Twitter. Email Jonathan at jonathan.shapiro@afr.com
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Summary | 3 Annotations
elevated house prices and stagnant wages were not a healthy combination
2021/03/09 22:42
tightening lending criteria to cap exuberance
2021/03/09 22:43
We are not at this point, but we are watching carefully.
2021/03/09 22:43