RBA’s Philip Lowe calls for restraint on future minimum pay rises

Philip Lowe warns that tackling inflation will be harder if this year’s big minimum pay increase becomes a ‘quasi-benchmark’ for wage negotiations.

Reserve Bank of Australia Governor Philip Lowe’s speech in Sydney comes a day after the RBA board delivered its 12th rate hike. Picture: NCA NewsWire/Nikki Short

Reserve Bank governor Philip Lowe has warned that further big increases to the minimum wage risks entrenching unsustainably high pay demands across the broader workforce and making it harder to bring inflation under control without sinking the economy.

Dr Lowe said the 5.75 per cent wage boost to the country’s lowest paid workers was “higher than we had factored into our forecasts”, but that it was just one of many factors that had triggered Tuesday’s twelfth rate hike.

“It’s not like we’re just responding to the Fair Work Commission. How much it adds to the inflation outcomes really depends upon whether it spreads across other parts of the labour market,” he said.

“The share of the labour force that‘s covered by the award increases is still fairly small. And the concern would arise if the five-and-three-quarter per cent increase became a benchmark or a quasi benchmark for outcomes in private sector wages more broadly.

“I’m really hopeful that doesn’t happen.”

“So we‘re in a difficult position when society understandably wants to protect the lowest paid workers, but we’ve got to make sure that the higher inflation doesn’t translate into higher wage outcomes for everybody.”

Dr Lowe noted last year’s inflation-matching increase to the minimum and award wages hadn’t flowed through the broader wage negotiations across the labour force.

“So we have some experience here, but the longer these big increases go on, the harder it will be for wage outcomes in negotiated agreements to stay where they are. So it‘s a risk factor we’re monitoring, and the solution here is stronger productivity growth to underpin big increases in nominal wages.”

The governor defended his board’s decision to lift rates this week, saying the pain felt by Australians today was the necessary price to pay to rid the economy of sky-high inflation.

Dr Lowe said “our job at the central bank is to make sure that this period of high inflation is only temporary”, and that the RBA board’s “priority” was to avoid a “self-perpetuating” inflationary cycle that would require even higher rates and more unemployment.

“High inflation is corrosive and damages our economy,” Dr Lowe told an investment conference in Sydney.

“It erodes the value of money and savings, puts pressure on household budgets, makes it harder for businesses to plan and distorts investment. It makes us all poorer and hurts people on low incomes the most,” he said.

Jim Chalmers on Tuesday said there would be “a lot of Australians who will find this decision difficult to understand and difficult to cop”, as he moved to inoculate the Albanese government from the political fallout from the most aggressive monetary policy tightening cycle since the late 1980s.

Dr Lowe, who has come under sustained and growing pressure over the past year, said “I acknowledge that the use of this (interest rate) tool comes with complications”.

“Its effects are felt unevenly across the community, with rising interest rises causing significant financial pressure for some households. But this unevenness is not a reason to avoid using the tool that we have,” he said.

“It is certainly true that if the board had not lifted interest rates as it has done, some households would have avoided, for a short period, the financial pressures that come with higher mortgage rates.

“But this short-term gain would have been at a much higher medium-term cost. If we had not tightened monetary policy, the cost of living would be higher for longer. This would hurt all Australians and the functioning of our economy and would ultimately require even higher interest rates to bring inflation back down.”

“So, as difficult as it is, the rise in interest rates is necessary to bring inflation back to target in a reasonable time frame.”

Dr Lowe repeated his favoured metaphor that the central bank is attempting to navigate a “narrow path … where inflation returns to target within a reasonable time frame, while the economy continues to grow and we hold on to as many of the gains in the labour market as we can”.

“It is still possible to navigate this path and our ambition is to do so. But it is a narrow path and likely to be a bumpy one, with risks on both sides,” he said.

After falling steeply since the end of last year, inflation in April picked back up to an annual pace of 6.3 per cent, from 6.8 per cent in the month before. While the start of the fuel excise cut a year earlier had distorted the headline figure, there was enough in the numbers to raise concerns at the RBA and among economists that consumer price growth could prove harder to tame.

Dr Lowe said he believed inflation was still trending lower, but that “strong growth in wages, against the background of weak productivity growth”, was making it harder to rein in price growth, especially in the services sector.

The governor said the board’s decision to increase the key cash rate to 4.1 per cent “follows recent information that has suggested greater upside risks to the bank’s inflation outlook”.

“Services price inflation is proving persistent here and overseas, and the recent data on inflation, wages and housing prices were higher than had been factored into the forecasts,” Dr Lowe said.

“Given this shift in risks and the already fairly drawn-out return of inflation to target, the board judged that a further increase in interest rates was warranted,” he said.

With the RBA only expecting to return inflation to the top of the 2-3 per cent target band by, mid-2025, Dr Lowe said “yesterday’s decision to increase interest rates again was taken to provide greater confidence that inflation will return to target within a reasonable time frame”.

“Some further tightening of monetary policy may be required, but that will depend upon how the economy and inflation evolve.”

With analysts pencilling in further one or two rate hikes over coming months, Westpac chief economist Bill Evans said the RBA board would make it three in a row with another increase to 4.35 per cent in July.