Reserve Bank of Australia’s Philip Lowe commits to ‘historic’ jobs milestone

Philip Lowe concedes it’s ‘plausible’ he will need to hike rates this year, but says he will not blindly follow overseas central banks.

Philip Lowe says ‘Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent’. Picture: Getty Images

Reserve Bank governor Philip Lowe has conceded it is “plausible” he will need to hike rates this year, but says Australia will chart its own path in managing the ­global inflation challenge and not blindly follow overseas central banks.

Dr Lowe said the country was past the worst of the Omicron ­crisis and predicted the economy would enjoy a “strong bounce back over the coming months” as he committed to achieving the “historic milestone” of a national unemployment rate below 4 per cent.

A day after announcing the end of the RBA’s $350bn bond-buying stimulus program, Dr Lowe for the first time opened the door to a possible rate hike in 2022 – a major shift from virtually dismissing the possibility as recently as late last year.

With unemployment already at 4.2 per cent and underlying inflation pushing above the middle of the RBA’s 2-3 per cent target range, he said “for the first time in some years, the achievement of our goals is within sight”.

But Dr Lowe, in a speech to the National Press Club in Sydney, also preached “patience”, saying inflation, while climbing, ­remained relatively low, and there was no need to rush to rate hikes – especially given the difficulty in forecasting economic outcomes during a pandemic.

“We’ve got to remember that underlying inflation has only just got to the midpoint of the target point for the first time in seven years. So I don’t think that ­requires an immediate response,” he said.

Covid-related price gains should prove temporary, he said.

Ahead of the release of an updated set of economic forecasts in Friday’s Statement on Monetary Policy, Dr Lowe said the bank ­expected the jobless rate to drop to 3.75 per cent by the end of this year, and to stay at that level – the lowest since the early 1970s – through 2023.

He emphasised that alongside delivering low and stable inflation, the RBA was charged with achieving full employment, and flagged that he was not prepared to jeopardise further employment gains with a premature monetary policy tightening.

“It is also relevant that Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent. This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities,” he said.

“I think that we can test how much we can get the unemployment rate down without having an inflation problem in the country. And that’s worth doing.”

Scott Morrison on Wednesday said the government would keep “fighting” to push unemployment below 4 per cent. “Jobs change people’s lives, they change families, they change communities,” the Prime Minister said.

“The job is about getting unemployment down. So we are getting people in training, we are getting people in jobs. And an unemployment with a three in front of it – that’s worth fighting for.”

Opposition Treasury spokesman Jim Chalmers said “it’s not the right type of recovery when Australians aren’t getting the wages growth they need and ­deserve”.

“We don’t want a free-for-all for wages growth. We need ­sensible, responsible, sustainable wages growth,” Dr Chalmers said.

Dr Lowe conceded that the bank had underestimated how well the economy would recover in 2021, and the quicker progress towards full employment and inflation in the target “does bring forward the timing of a likely increase in interest rates”.

“We should welcome that,” he said. “Whether (a rate hike) happens this year or not remains to be determined. It will depend upon how the supply issues are resolved and the strength of the pick-up in labour costs.

“If things go well, and the economy performs strongly, then … it’s certainly a plausible scenario that rates go up later this year.”

Dr Lowe emphasised the extraordinary uncertainty around wage and inflation outcomes, and that it was “too early to conclude that inflation is sustainably in the target range”.

“We will be watching consumption patterns and whether they normalise. We will also be looking for further evidence that labour costs are growing at a rate consistent with inflation being sustained within the target range. We expect this evidence to emerge over time, but it is unlikely to do so quickly.”

Dr Lowe noted that with inflation still well below those in other advanced economies such as Britain and US – where inflation is running at 5-7 per cent – “we are in the position where we can take some time to obtain greater clarity on these various issues”.

Dr Lowe dismissed union claims the unemployment and wages gains were just down to closed borders, saying the tight labour market was mainly the result of “large” monetary and policy stimulus through the pandemic. The RBA governor would not offer an opinion on the ideal pace of migration, but said “allowing people to … come into the country with skills is incredibly important”.

Dr Lowe said while the bank now expected core inflation to reach 3.25 per cent this year before moderating to 2.75 per cent through 2023, “there are significant uncertainties as to the persistence of the recent price pressures”.

He revealed conservative new wages growth forecasts, predicting an increase from 2.2 per cent to 2.75 per cent by the end of this year, up from 2.5 per cent, and held the 2023 prediction at 3 per cent. This is the level the governor has previously said is consistent with the central bank meeting its inflation target on a sustainable basis, although in Wednesday’s speech he made a point of saying the bank also considered other measures of pay.

“Wages growth has picked up as well (as inflation), but it has only just returned to the rates prevailing prior to the pandemic,” he said, and pointed to “substantial inertia in aggregate wage outcomes even if there are large wage increases in some pockets”.

“This inertia stems from multi-year enterprise agreements, the review of award wages that takes place on an annual basis and public sector wages policies.”

Consumer price data released last week revealed underlying inflation reached 2.6 per cent over the year to December – the first time it has been above the midpoint of the RBA’s 2-3 per cent target range since 2014. That triggered market bets of a rate hike as soon as May or June, and economists to pencil in a move between August and November.