The RBA say the era of paltry pay rises in Australia may continue for a long time yet

MARCO BERTORELLO/AFP/Getty Images
  • Australia’s unemployment rate, at 5%, sits at the lowest level in more than six years.
  • The Reserve Bank of Australia (RBA) previously deemed this level to be where wage increases started to pick up, but not any longer.
  • “I suspect, nationwide, we could go to 4.5% unemployment without lifting wage growth too much,” RBA Governor Philip Lowe said in a speech on Tuesday.


Australia’s unemployment rate, at 5%, sits at the lowest level in more than six years.

That’s deemed by some to be “full employment”, the point where wage pressures are expected to accelerate. It’s also known as the non-accelerating inflation rate of unemployment, or NAIRU for short.

The Reserve Bank of Australia (RBA) previously saw NAIRU at around 5%, but not any longer.

In a speech delivered to the annual CEDA dinner in Melbourne on Tuesday evening, RBA Governor Philip Lowe suggested full employment is now likely to be lower that it previously thought.

“I suspect, nationwide, we could go to 4.5% unemployment without lifting wage growth too much,” Lowe said in a response to a question from the audience.

While no one, including Lowe, knows what Australia’s NAIRU level is until wage pressures actually accelerate, his remark suggests unemployment will have to fall significantly further before we start to see meaningful, self-sustaining wage increases for the average worker.

In the bank’s latest forecasts offered earlier this month, it didn’t see unemployment falling below 4.75% until the end of 2020.

As a major factor that helps to drive non-tradable inflation, that forecast, coupled with Lowe’s remarks on wage growth overnight, helps explain why the RBA doesn’t see underlying inflation returning to the midpoint of its 2-3% medium term inflation target over the next couple of years.

RBA

So what are the ramifications?

Based on Lowe’s new estimate of full employment, it’s unlikely Australian workers will see larger pay increases for some time yet unless unemployment falls far quicker than the RBA and others currently expect.

It also means that there’s unlikely to be any increase in the RBA cash rate for the foreseeable future, with the risk of a possible cut not entirely ruled out should Australian unemployment, inflation and GDP not move in the direction the RBA currently expects.

“The economy is moving in the right direction and further progress is expected in lowering unemployment and having inflation consistent with the target,” Lowe said.

“The probability of an increase in interest rates is higher than the probability of a decrease.

“If the economy continues to move along the expected path, then at some point it will be appropriate to raise interest rates. This will be in the context of an improving economy and stronger growth in household incomes.

“There is a reasonable probability that the current setting of monetary policy will be maintained for a while yet. This reflects the fact that the expected progress on our goals for unemployment and inflation is likely to be gradual.”

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