In his speech in Sydney on Wednesday, Reserve Bank Governor, Philip Lowe shifted the Reserve Bank’s focus to employment to get markets to understand the importance of wages and full employment, as well as prices and interest rates in the central bank’s thinking over the next few years.
In fact his speech made it clear that wages growth and full employment would be as important to the bank as inflation and interest rates.
This stance helps explain in greater detail why the bank will not be lifting rates any time soon – 2024 at the earliest – a point he again made clear on Wednesday.
Companies, unions, and government will hear this message for a while. Some investors seem focused on inflation and interest rates (and housing prices) to the exclusion of everything else.
Dr Lowe again referenced the slow population growth Australia is now experiencing because of virtually no migration. He reminded those worried aboyt the current big rises in prices that there are a lot of factors that impact here.
“Time will tell as to how these various factors ultimately balance out, but history suggests that shifts in population growth can have large effects on the housing market.”
It is the second time in a month that Dr Lowe has mentioned the impact of low migration in connection with house prices – that’s a big hint that house pries are going to be under pressure the longer migration and population growth remains weak.
But employment, wages and prices are the focus, as he again made clear on Wednesday.
“Currently, wages growth is running at just 1.4 per cent, the lowest rate on record, he said.
“Even before the pandemic, wages were increasing at a rate that was not consistent with the inflation target being achieved.
“Then the pandemic resulted in a further step-down. This step-down means that we are a long way from a world in which wages growth is running at 3 per cent plus.
“The evidence from both Australia and overseas strongly suggests that the journey back to sustainably higher rates of wages growth will take time and will require a tight labour market for an extended period.
“Prior to the pandemic, multi-decade lows in unemployment rates were recorded in many countries, yet even then there was only a modest lift in wages growth and inflation.
“And here in Australia, even though unemployment rates in some states fell to levels last recorded in the early 1970s, wage growth remained subdued.
“At the moment underlying inflation is running at 1.25% per cent, and we expect it to remain below 2% over at least the next 2 years,” he said.
Dr Lowe said even when inflation jumps to around 3% in the June quarter (because of the fall in the June, 2020 quarter due to the lockdowns and Covid), the central bank will not be looking to change policy.
But he said the recent improvements in economic data “do not negate the fact that there is still a long way to go and that the Australian economy is operating well short of full capacity.”
“… our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024. This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.
“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.”
“I also want to emphasise that the monetary stimulus is not just about achieving an inflation rate of 2 point something. It is just as much about achieving the maximum possible sustainable level of employment in Australia.
“Unemployment is a major economic and social problem and the Board places a high priority on a return to full employment,“ Dr Lowe said.
“But based on this experience, it is certainly possible that Australia can achieve and sustain an unemployment rate in the low 4s, although only time will tell. As we progress towards full employment, we will be relying on the wages and prices data to provide a signal as to how close we are. The current signal is that we are still a long way away from full employment.
“Consistent with the judgement that the condition for an increase in the cash rate is unlikely to be met before 2024, the Bank remains committed to the 3-year yield target. We are not considering removing the target or changing the target from 10 basis points,” Dr Lowe said.
