Reserve Bank of Australia (RBA) governor Philip Lowe just delivered an excellent speech to the Anika Foundation luncheon in Sydney, looking at the relationship that exists between labour market conditions, wage pressures and the outlook for inflation, and not just in Australia, but abroad.
He spoke at length about the changing dynamics of wages growth being seen around the world, and devoted a large part of his speech attempting to explain why wage pressures have been so weak both in Australia and abroad.
However, beyond the factors that have contributed to weak wages growth in the past, what markets really wanted to hear was Lowe’s views on current labour market conditions in Australia, and whether recent strength in jobs data had shifted his thinking on the outlook for wage and inflation pressures.
On that front he expressed cautious optimism.
“If we look at just the past few months, there has been a welcome pick-up in employment growth right across the country, after a period of softness,” Lowe said.
“The forward-looking indicators suggest that employment growth will continue.
“Job ads, job vacancies and hiring intentions have all lifted. Businesses are also reporting better conditions than they have for some years.”
Despite that optimism, Lowe acknowledged that Australia’s employment rate is still around half a percentage point above the bank’s current estimates of full employment in Australia, a reality that he believes makes it unlikely there’ll be rapid increase in wage and inflationary pressures, at least in the near term.
“This scenario can’t be completely discounted,” Lowe said.
“It would seem, though, to have a fairly low probability in Australia, especially in light of the continuing spare capacity in our labour market.
“The more likely case here is that wage growth picks up gradually as the demand for labour strengthens.”
That view, along with his admission that Australia’s economy is still well away from reaching full employment, suggests that the RBA is in no rush to tighten monetary policy settings.
Indeed, he said that he was very comfortable with current policy settings.
“The fact that the labour market has been generating sufficient jobs to keep the unemployment rate broadly steady has allowed us to be patient,” he said.
Lowe admitted that a gradual increase in wages is a central element in the RBA’s current forecasts for inflation to return to around the mid-point of its target range, providing a big clue for markets as to what financial markets should be watching when it comes to the outlook for official interest rates: upcoming wage data.
That’s something markets will get further clarity on when the ABS releases Australia’s June quarter wage price index on August 16.
Like his deputy Guy Debelle did last week, Lowe also pushed back on suggestions that the RBA will start lifting rates because other major central banks such as the US Federal Reserve and the Bank of Canada have embarked on policy normalisation, noting that “this has no automatic implications for monetary policy in Australia”.
“These central banks lowered their interest rates to zero and also expanded their balance sheets greatly. We did not go down this route. Just as we did not move in lockstep with other central banks when the monetary stimulus was being delivered, we don’t need to move in lockstep as some of this stimulus is removed,” he said.
“Our decisions will continue to be made within the framework of our medium-term inflation target. We are intent on delivering Australians an average rate of inflation over time of between 2 and 3%.
On the level of the Australian dollar, another area subject to speculation before the speech arrived, Lowe took a softly-softly approach, telling the audience in question-and-answer session that it would be helpful if the Australian dollar was “a bit lower” than where it currently sits.
There has been little reaction to the speech across financial markets, with the governor’s remarks on the outlook for monetary policy largely unchanged from what had been communicated by the bank previously.
It’s confident on the outlook for the economy, but it’s in no rush to hike rates.