The governor of Australia’s central bank continues to insist that low-interest rates amid record rising property prices will be part of the country for many years because there is no hope of a quick return on wage growth.
Philip Lowe used a speech at a conference called by the Australian Financial Review on Wednesday to show that the official cash rate would remain at a low level until “at least 2024” because there is no hope that wage growth will hit more than 3% before then.
Wage Growth And Inflation
“The point I want to emphasise is that for inflation to be sustainably within the 2-3% target range, wages growth needs to be materially higher than it is currently,” the reserve bank governor said.
“Evidence strongly indicates that this will not happen soon and that it will require strong labor markets to strengthen over time. Guessing how long it will take is difficult by nature, so there is room for different ideas.
“But our decision is that we are unlikely to grow wages in line with inflation before 2024. This is the basis for our assessment that interest rate is likely to remain at this level until at least by 2024.”
Lowe noted that Australia’s wage growth was now at 1.4% – “the lowest level on record”. He said the salary increase was long before Covid-19, “then the epidemic led to their resignation”.
What Did The Governor Say?
“Powerful structural factors” explained the story of anaemic wages growth, he said, including increased competition in goods markets, “which makes firms very conscious of cost increases”; the trend towards more services being provided internationally; advances in technology “which have reduced the demand for some types of skills and increased the demand for others”; and changes to the global supply of labour and regulation of labour markets.
Together, these factors have changed wage rates and prices in almost all high-income economies and these changes are likely to continue. This means that, if there is no other major shock, it is a long way back to seeing wage increases consistent with the inflation target.”
Lowe said he was encouraged by the accuracy of the data for economic growth and unemployment. Recent South African accounts, released this month, show that the economy grew by 3.1% in the quarter of December as domestic recovery from the scourge of the epidemic combined.
But Lowe said strong numbers “do not contradict the fact that there is still a long way to go and that the Australian economy is doing well short of full capacity”.
“There are still many people who want a job and can’t find one and many others want to work more hours, and on the nominal side of the economy, we have not yet experienced the same type of bounce-back that we have seen in the indicators of economic activity.”
Lack Of Investment
Lowe said the investment in the business was less than it should have been, noting that the return in consumption levels after the end of the closure was “strong” but the investment was “a different matter”.
“While there was a welcome pick-up in the December quarter, particularly in machinery and equipment investment, investment is still 7% below the level a year earlier and over 10% below where we thought it would be at the start of last year,” Lowe said.
The weakness was part of a trend, he said: “This weakness in business investment follows a run of years in which non-mining business investment as a share of nominal GDP was already low by historical standards.”
A durable recovery from the economic shock associated with the pandemic required business investment to pick up, he said, but added that there was “no magic ingredient for boosting business investment”.
“A good starting point, though, is businesses having confidence that the economy will grow and that there will be demand for their products and services,” the governor said. “Another important ingredient is having stable and predictable regulatory regimes [and] access to finance on reasonable terms is also important.”
