Lowe: Upside Inflation Risks Increased Since April Pause

In the Q&A session following Governor Lowe’s prepared remarks he reiterated the Board’s commitment to returning inflation to target but also noted that the fundamentals of the Australian economy are “very positive”. He also said that the current 2-3% target band is appropriate for Australia and that QT is not an effective policy tool when rates are available.

• He commented that the decision to increase minimum award wages by 5.75% was only one factor in the Board’s June decision to hike. It was higher than the RBA was forecasting but he said that it only impacted a small share of employees and thus is only a concern if it becomes a benchmark for wage increases generally. This didn’t occur after last year’s minimum wage rise, but the risk is that the longer these levels of increase go on, then the harder it will be for them not to become a benchmark.
• In terms of wages, he reiterated that increases should be in line with 2.5% plus productivity growth and so the latter is key in making larger pay rises sustainable and not inflationary. He observed that strong services inflation is linked to current high unit labour cost growth.
• The other factors considered in June along with the minimum wage decision were overseas developments, domestic inflation, house prices, AUD, and Federal and state wage policies.
• The May/June tightening following the April pause didn’t reflect a shift in inflation tolerance but an increase in inflation risks. There had been upside surprises on wages, house prices and foreign & domestic inflation, which have a high correlation. These risks were testing the limit of the RBA’s patience.