‘Trouble’: RBA boss Philip Lowe’s big call on pay rises as rates spike

The RBA boss has made a bold statement about whether Australians should receive a pay boost while defending the bank’s latest rate hike.

Australians hoping for a pay rise to soften the blow of soaring cost of living have been warned to lower their expectations by the Reserve Bank boss.

Governor Philip Lowe said while it was perfectly understandable for the lowest paid to get a wage boost, accepting the argument all workers should get a boost could cause “trouble”.

“If we accept that premise, inflation at 7 per cent and wage rises match that, what do you think inflation will be next year?” he told the Morgan Stanley Australia summit in Sydney.

“It will be higher again and then we will have to have higher wage increases again.

Reserve Bank governor Philip Lowe says juggling inflation and wages is a tricky balance. Picture: NCA NewsWire / Christian Gilles

“We are in a difficult position where society wants to protect the lowest paid workers but we have got to make sure that the higher inflation doesn’t translate into higher wage outcomes for everybody.

“If that happens, the inflation persists … It is a tricky balancing act we are trying to manage at the moment.”

The governor of the central bank’s comments come just days after the Fair Work Commission’s decision to increase minimum award wages by 5.75 per cent on July 1.

Dr Lowe, who received north of $1 million in combined wages and benefits this year, said the increase had been factored into the RBA’s wages forecasts.

“How much it adds to inflation outcomes really depends upon whether it spreads across other parts of the labour market,” he said.

“The concern would arise if the 5.75 per cent increase became a benchmark … in private sector wages more broadly.”

The governor is concerned strong wage increases paired with flatlining productivity growth posed a risk to returning inflation back to the bank’s 2 to 3 per cent target.

Since May 2022, the RBA has aggressively raised rates from a record low 0.1 per cent to 4.1 per cent in a bid to curb inflation.

Monthly figures released by the ABS last week show the annual inflation rate jumped from 6.3 per cent to 6.8 per cent in April.

Defending Tuesday’s rate rise, Dr Lowe reiterated while the inflation peak had passed, further interest rate hikes remain a possibility and warned of a “bumpy” economic road ahead.

But he said wage increases were not the only driver of “upside risks” for the central bank.

“Inflation for April was higher than expected. We have seen housing prices rise again and we thought they would still be falling,” the governor said.

Dr Lowe reiterated future rate hikes were a possibility. Picture: NCA NewsWire / Christian Gilles

“When we look overseas we see a lot of persistence in services price inflation because unit labour costs are rising quickly.

“We felt like we couldn’t just sit idly and say ‘this is all accidental’.

“We have been prepared to be patient in getting inflation back to target but our patience has a limit and the risks are testing that limit and so we thought we needed to respond after holding steady in April.”

Asked if he agreed with the RBA’s decision, Treasurer Jim Chalmers said it wasn’t up to him to second guess the central bank board.

“I think that is self-evident and therefore uncontroversial to point out that when interest rates go up, it makes life harder for people. I think that is a fact,” Dr Chalmers said.

“When it comes to explaining the decisions they take independently as the Reserve Bank board, that is a key feature of the system as well – I think it’s a good thing frankly.”