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RBA Will 'Be Patient' In Rate Hike Timing

Reserve Bank governor, Dr Phil Lowe has ruled out using monetary policy (interest rates) to try and boost inflation and through that, lift wage growth in Australia from its current sluggish level of around 2%.

Speaking in Portugal at a central bankers conference he again questioned whether Australian wage growth will accelerate from its current 2% level and saw little chance of inflation helping lift wages higher in the immediate future.

In fact he again left the firm idea for Australian viewers of the video that any talk of a rate rise in ths country before late 2019 at the earliest would be very optimistic.

Dr Lowe told the ECB’s annual conference in Portugal on Wednesday (See below at around 16.46 minutes) that “the effectiveness of more monetary stimulus to solve the lack of inflation is questionable, I see clear risks from doing that…I don’t see the risk-reward trade-off being particularly effective.”


He said that with inflation low, jobs growth sold, more monetary stimulus would push up asset prices which would eventually lead to problems when interest rates rose.

But he gave himself an out so long as the labour market “is improving” central banks should “be patient” on monetary policy. That would indicate that if the central bank sees the labour market slowing sharply then a rate cut would become an option.

The RBA has started noting in its monthly minutes for the past couple of months that the Australian labour market is now slowing. The Australian Bureau of Statistics monthly Labour Force reports have shown jobs market growth slowing from just over 3% in 2917 to 2.6% in the year to May - that is still solid but some of that is due to a growth in the population of around 1.6%.

For the second time in a week, Dr Lowe pointed out that low wage growth and inflation are linked and are causing the central bank all sorts of grief - and from his comments in Portugal he doesn’t see that improving any time soon.

“In Australia the inflation rate has been below the mid-point of our target for some years and it is going to stay that way, I think..Wage growth has repeatedly surprised on the downside and the current rate if wage growth isn’t consistent with us (the RBA) achieving our inflation target on a sustained basis,” Dr Lowe said.

Those remarks were similar to what he told a Melbourne lunch last week (http://www.rba.gov.au/speeches/2018/sp-gov-2018-06-13.html):

"One is that the low growth in wages is contributing to low rates of inflation in Australia. Indeed, if wages growth were to continue at around its current rate for an extended period, it is unlikely that the rate of inflation would average around the midpoint of the inflation target in the period ahead. Wages growth of 2 per cent and reasonable labour productivity growth are unlikely to make for 2½ per cent inflation on a sustained basis,” Dr Lowe said in Melbourne.

Mr Lowe told the ECB’s annual conference in Portugal (with the heads of the US Federal Reserve, the Bank of Japan and the European Central Bank on the same panel) the fact that so many countries were grappling with the same issues meant the underlying causes of low wage growth were “probably global” and “probably structural…

“The system looks less inflation prone than it once was,” he said. “We just need to accept inflation will be lower for a while.” He said for central bankers, it would be a case of “being patient so long as the labour market is improving.”

And in his remarks Dr Lowe did not mention at all using fiscal policy (tax changes) to boost inflation or wages.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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