Australians should expect “fairly gradual” wage growth and for interest rates to remain on hold for “a while yet”, according to the Reserve Bank governor, Philip Lowe.
On Friday Lowe said Australia’s economy had continued to move in the right direction, with GDP growth of 3.1%, inflation at 2.1% and unemployment at 5.3%, which he labelled a “pretty good set of numbers”.
Lowe told the House of Representatives standing committee on economics the global outlook remained positive, but listed risks including an escalation of global trade tensions and the risk of increased inflation in the US due to “highly unusual” fiscal stimulus at a time of high growth.
Lowe said the Reserve Bank wanted to make further progress towards full employment and for inflation to be comfortably within the target range of 2%-3% “on a sustained basis”.
The bank would keep its current stance on interest rates until those benchmarks were “more clearly in sight” and there was “not a strong case for a near-term adjustment” in interest rates. The official cash rate has been 1.5% since August 2016 and has not risen since late 2010.
Lowe reiterated his comments that an increase in wages would be a “welcome development” because it would help reduce household debt, boost government coffers and help “strengthen the sense of shared productivity” gains.
Lowe admitted it was “controversial” for a Reserve Bank governor to barrack for higher wages, but said he did so to prevent wage expectations falling further. That and keeping interest rates low to tighten demand in the labour market were all the central bank “can and should do” to boost wages, he said.
Lowe noted that wages – as measured by the wage price index – were up 2.1% and when bonuses were included pay was up 2.5%. Unemployment of 5.3%, while volatile, was “the lowest for a number of years”.
Lowe predicted improved wage growth as the labour market continued to tighten, but said it was “still expected to be fairly gradual”.
Although indicators including business hiring intentions and the high number of vacancies as a share of the labour market pointed to wages growth, he said there was “still some spare capacity”, with part-time workers wanting more hours.
Asked whether the budget’s forecast of 2.75% wage growth next year could be achieved, Lowe said it was “possible, even probable” that aggregate earnings would reach that level, but only when extra pay including bonuses was considered.
Lowe said the “pullback” in house prices in Sydney and Melbourne was a “welcome development”, putting the market on a better footing after a period of unsustainable rising prices, debt and lower affordability.
While banks were tightening lending standards in response to the banking royal commission, Lowe said reduced demand from investors had caused the price falls.
Lowe said the banking royal commission had exposed how financial institutions had difficulty managing conflicts of interest, and remuneration structures had driven a sales culture that was not always in customers’ best interests.
But he warned against an “overreaction”, warning that despite “terrible shortcomings” regulation still needed to strike a balance between protecting customers and allowing financial innovation.
“I don’t think the solution is more and more regulation,” he said.
Lowe noted trade tensions between the United States and China, and that the IMF had slightly downgraded its growth projections in response.
He said an increase in tariffs of between 10% to 25% would be “manageable” for Australia, slowing global growth but not halting economic expansion. But he warned of a “worst-case scenario” if tariffs were combined with lower business investment, which would be a “very damaging cocktail”.
Lowe said he was “less relaxed” than global financial markets about US policies of enacting fiscal stimulus through increased spending and reduced taxes.
He said it was “highly unusual” to do so at a time when the deficit was 4%-5% of GDP, while the US was growing at above its trend rate and had high public debt due to the “inability to reform entitlements”.
