Australia's top central banker pledged on Wednesday to keep interest rates near zero until there were enough jobs in the economy to push wages growth and inflation higher, a goal that has eluded the country for more than a decade.
Reserve Bank of Australia (RBA) Governor Philip Lowe reckons it will be another three years before policymakers achieve their objective, meaning policy will stay accommodative at least until 2024.
"We've got to get back to an unemployment rate of four point something to get the type of wage pressures that will deliver inflation outcomes consistently 2.5% on average. That still seems a long way away," Lowe said, responding to questions in Canberra following a speech titled 'The Year Ahead'.
The jobless rate is hovering around 6.5% after jumping to 7.5% last year in the wake of the coronavirus pandemic-driven recession.
The RBA doesn't see the rate hitting 4% through its forecast horizon. Wage growth at 1.4% is less than half the pace of what Lowe had said was needed to ignite inflationary pressures.
"We will not be adjusting interest rates until we're confident that inflation is going to be back solidly between 2% and 3%," Lowe added.
"And because of the link to the labour market we see that being a long time away and that's why we're confident in saying that it's unlikely that interest rates go up for three years."
The RBA held its cash rate at a record low 0.1% on Tuesday, and surprised the market by extending its bond buying programme by another A$100 billion ($76 billion).
Lowe said the stimulus was working as expected, including keeping a lid on the local dollar, and welcomed the relative outperformance of Australia's A$2 trillion economy after largely controlling its coronavirus outbreak.
MORE STIMULUS ON CARDS
Lowe's remarks prompted economists to predict the RBA would extend its bond buying programme again later this year.
"The door is clearly open to QE-3 and we think further extension is likely," said RBC economist Su-Lin Ong.
The Aussie was last at $0.7612, not far from a two-month trough of $0.7564 touched on Tuesday. Ten-year bond futures eased a little but were above a recent three-week low at 98.815.
Australia's worst downturn since the Great Depression, rising unemployment and feeble inflation prompted the RBA to slash the cash rate three times last year and boost its balance sheet from A$180 billion to A$330 billion.
The federal government joined in by unleashing a A$300 billion fiscal spending plan.
The stimulus has ignited a fire in the housing market where prices are at record highs, home loans have surged and approvals to build standalone houses have jumped 55% over the past year.
The resurgence in the property market supports household balance sheets and encourages spending through positive wealth effects, Lowe said, noting higher prices can also encourage
further residential construction.
"I find it hard to express concerns about the development in asset prices to date," Lowe said when asked if he was worried about a housing bubble.
"The issue for us would be if on the back of rising house prices people were borrowing a lot of money and they weren't doing that sensibly," Lowe said, adding regulators would step in if that were to happen.
($1 = 1.3148 Australian dollars)
(Reporting by Swati Pandey and Wayne Cole in Sydney; Editing by Lincoln Feast and Jacqueline Wong)
