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The RBA governor says a reduction in real wages is essential to keep the lid on inflation.
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Real wage growth now will push rates higher, warns Lowe
29 November 2022
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10 minute read
RBA governor Philip Lowe says keeping wage growth below inflation will be better for the nation in the medium and long term because the alternative is higher interest rates later.
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“As difficult as it is, we’re going to get better outcomes over the medium term by accepting some modest reduction in real wages this year, and then by the time we get into 2024 if inflation is back to 3 [per cent], our expectation is that growth in labour costs would be around 4 [per cent] and that should be okay.”
“So real wages, real incomes of people will be rising again as we go into 2024.”
“But if we seek to have no reduction in real wages this year, we’ll have to have higher interest rates later on.”
Appearing before the Senate Economic Legislation Committee, Mr Lowe was asked about the RBA’s response during the pandemic and prospects for the economy.
The government has been aiming to increase real wages following its election campaign pledges and commitment to the industrial relations bill before parliament.
Dr Lowe said it was his responsibility to caution against wage growth running at the same level as inflation because that would result in further economic problems.
He pointed to the US, UK, and Canada as nations struggling economically post-pandemic and said high wage growth was hampering their progress.
“If growth in labour costs doesn’t accelerate too much, aggregate growth in labour costs at the moment in Australia is consistent with inflation returning to target,” said Dr Lowe. “So right at the moment I don’t think we’ve got a problem, many other countries do.”
“The US, UK, and Canada, wage growth 5.5, 6 per cent, at the aggregate level, those rates of increasing labour costs aren’t consistent with inflation returning to target, our growth and the rate of growth in labour costs is consistent with inflation reaching the target.”
“I’ve drawn attention to the risk in the hope of avoiding it,” he said.
Dr Lowe said the RBA was in favour of wage growth but not at the expense of the economy.
“We share your ambition to have real wages rising, and people to have jobs, that's going to make the society a much better place if people have got jobs and real wages are rising,” he said.
“We want to see real wages growing, people get better living standards and they have more opportunities when real wages are growing but we’ve got to be realistic, what's achievable when inflation is at its highest rate in 30 years.”
Dr Lowe highlighted three factors that would greatly influence inflation: the resolution of global supply problems, dropping commodity prices, and rising interest rates.
“Shipping times are coming down, delivery times are shortening and the disruptions to the supply chain, which had been so prevalent for the last few years are gradually being resolved and prices for many goods are no longer rising quickly,” he said.
“The second thing that’s going to help is commodity prices have stabilised and actually come back down again, most commodity prices are back to where they were in January before Russia invaded Ukraine.”
“The third thing that will help is the increase in interest rates, that is going to slow aggregate demand in the economy, that’s the intention, and slower growth in aggregate demand will mean less pressure on capacity.”
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