Workers be warned, you won’t see a pay rise for years, says RBA

RBA governor Philip Lowe has signalled Australian workers are unlikely to get a meaningful lift in pay until the middle of the decade, and perhaps beyond.

Reserve Bank Governor Philip Lowe says it was ‘regrettable’ that the central bank had missed its inflation target for ‘five or six years’. Picture: Getty Images

Reserve Bank governor Philip Lowe has signalled workers are unlikely to get a meaningful lift in pay until the middle of the decade and warned that businesses and government would need to take the lead in driving prosperity.

Appearing before a parliamentary committee in Canberra, Dr Lowe said the task of pushing wages growth substantially above its current historically low level would require an even tighter ­labour market than existed before the COVID recession.

“Drawing on the experience before the pandemic, I think we need a low unemployment rate — lower than we got to before the pandemic — to be sustained for a number of years,” he said.

The comments came as the RBA released its latest set of economic forecasts, which outlined a markedly more optimistic outlook than in November.

It now expects the jobless rate to fall from 6.6 per cent to 6 per cent by the end of the year, despite some jobs being lost in the ­immediate aftermath of the JobKeeper expiry on March 28.

In this “central scenario”, the key jobless measure will return to around pre-pandemic levels of 5.25 per cent by the end of 2023. “Even by mid-2023, the unemployment rate is still likely to be higher than is consistent with a tight labour market and a strong pick-up in wages growth,” the RBA said.

Annual growth in the wage price index — the RBA’s preferred measure — “is expected to remain below 2 per cent over the next few years, even slower than the low rates recorded prior to the ­pandemic”.

Based on Dr Lowe’s comments, this suggests wage growth of about 3.5 to 4 per cent would only begin to manifest in the second half of the decade. Even in the RBA’s ­“upside scenario”, where unemployment drops below 5 per cent in the second half of next year, the prospect of substantial pay rises remains distant.

Westpac chief economist Bill Evans said that “such forecasts suggest that the RBA may be ­extremely doubtful that even 2024 seems a realistic goal” for raising rates above 0.1 per cent.

Days after unveiling a commitment to spend another $100bn to help support the post COVID ­recovery, the RBA governor also warned that even the cheapest money in history was not enough to secure the nation’s prosperity.

“Monetary policy cannot drive increases in our living standards,” he said. “We can maybe get there a bit quicker with monetary policy, we can maybe avoid some of the downsides, but the Reserve Bank board can’t drive sustainable ­increases in living standards. That comes from businesses and governments investing in the things that make us more productive over time.”

He said there was no “silver bullet” to getting businesses ­investing again. In the short term, “getting the economy moving again will encourage investment”.

Beyond supporting the recovery, Dr Lowe said a key focus should be placed on three segments of the economy where “if we can get the policy settings right, I see tremendous opportunities for Australia”. He identified the digital economy, and the aged care and energy sectors as priorities.

The RBA has not forecast a ­return to the 2-3 per cent inflation rate target until beyond 2023, following five or six years of missing its consumer price growth mandate — a record which Dr Lowe described as “regrettable”.

Nonetheless, he said that “over time inflation in Australia is going to have an average of 2 per cent”.