Wages growth needs to be sustainably above three percent before the Reserve Bank of Australia (RBA) considers raising official interest rates, says RBA governor Philip Lowe.
In his speech to The Australian Financial Review’s (AFR) business summit, the governor disagreed with market expectation for a cash rate increase late next year and then again in 2023.
“This is not an expectation that we share,” Lowe said.
Lowe says the bank is committed to maintaining the current 0.1 percent cash rate for as long as required and hopes to see inflation sustainably return to a level of around 2 to 3 percent.
Inflation rates are currently at 1.25 percent, and the RBA forecasts it to remain below 2 percent for another two years.
To return to sustainable interest rates between 2 to 3 percent, Lowe says wages growth “needs to be materially higher” than it is currently.
“But our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024,” he said. “This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”
Australian wage growth has remained stagnant without a significant increase over the last decades. It only fell further due to COVID-19 to its current rate, the lowest on record at 1.4 percent.
However, Lowe notes that this stagnation is a global experience with advanced economies worldwide seeing similar levels of stagnation after the development of a global labour supply market, increased competition and integration of better technology into the workspace among others has forced wages down.
“Together, these factors have altered wage and pricing dynamics in almost all advanced economies and these changes are likely to persist.,” Lowe said. “This means that, in the absence of another major shock, it is a long way back to seeing wage increases consistent with the inflation target.”
Former treasurer Peter Costello said while the governor was reassuring people the rates would stay low for as long as necessary, he hopes the country would not need it for long.
“I hope the cash rate won’t be at 0.1 percent in 2024,” Costello said during the AFR business summit on Tuesday. “That would tell me our economy is strong and doesn’t need the kind of life support that 0.1 percent represents.”
Costello emphasised that the current cash rates were only for emergencies and likened its effect on the economy to morphine for an emergency patient.
“These rates are emergency rates. They are for emergencies,” he said. “You know, imagine a patient in the hospital is in great pain; you might be delivering morphine, but it doesn’t mean the patient should be on morphine once they recover.”
Lowe also told the business summit that the bank placed a high priority on a return to full employment and that they were keeping an eye on the effects low-interest rates were having on the housing market.
