Reserve Bank of Australia governor Philip Lowe has forecast wage growth to hit 3 per cent in 2023, signalling the conditions for an interest rate rise will be in place next year and that rate increases are doubtful in 2022.
While underlying inflation is now firmly in the mid-range of the RBA’s 2–3 per cent target band and is set to move higher, Dr Lowe said there remained significant uncertainties about the economic outlook.
In particular, he highlighted the bank’s intention to wait and see how various pandemic-related supply-side problems resolve and the effects on prices, and also whether consumption patterns normalise over the year.
“We will also be looking for further evidence that labour costs are growing at a rate consistent with inflation being sustained within the target range,” Dr Lowe said in a speech to the National Press Club in Sydney.
“We expect this evidence to emerge over time, but it is unlikely to do so quickly.
“The board is prepared to be patient as it monitors the evolution of the various factors affecting inflation in Australia.”
But while previously pointing to wages growth at 3 per cent or higher as a key determinant of “sustainability”, Dr Lowe said the bank did not have a “specific definition as to what ‘sustainably in the target range’ means”.
“The actual rate of inflation is relevant, as are the trajectory and the outlook. So, too, is the breadth of price increases and the factors driving them,” he said.
Though striking a more dovish tone than markets and economists, which are predicting the record low 0.1 per cent cash rate could begin lifting as soon as August, Dr Lowe did express a desire to “make clear” that the bank did not “want to see inflation too low or too high” and would “do what is necessary to maintain low and stable inflation”.
“Which is important not only in its own right but also as a precondition for a sustained period of full employment,” he said.
Dr Lowe also made clear the bank’s decision to end its $350 billion bond buying program at Tuesday’s board meeting “did not mean an increase in the cash rate is imminent”.
The RBA board on Tuesday updated its forecast for unemployment to fall below 4 per cent later this year before stabilising at about 3.75 per cent in 2023. It also tipped underlying inflation to peak at 3.25 per cent.
In his speech on Wednesday, Dr Lowe revealed the bank’s central forecast was for wages to increase by 2.75 per cent this year and 3 per cent over 2023, but warned there remained significant inertia in the wage setting processes due to multi-year enterprise agreements and public service wage caps.
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