MNI INTERVIEW: RBA's Harper Says Wages Need 4% Growth

Reserve Bank of Australia board member and academic Ian Harper says that wages growth needs to be “about 4%” to drive inflation sustainably within the RBA’s target range and create the conditions for interest rates to rise.

In an interview with MNI on Thursday, Harper – the Dean of the Melbourne Business School – said that wages growth of around 4% should create 1.5% labour productivity growth and drive inflation sustainably into the mid-point of the RBA’s 2% to 3% target, see: MNI STATE OF PLAY: Dovish RBA Waits On Wages Growth.

“Gaining an increase in labour productivity growth to this level is problematic in the short run,” Harper said, speaking in a private capacity and not as an RBA board member.

“Demand is growing strongly, and supply is increasingly constrained so you would expect that nominal wages growth must pick up sometime soon – at least, that’s what history would suggest!”

OTHER INDICATORS ROBUST

Wages growth is at 2.3% with other key economic indicators more bullish. But the RBA has consistently pointed to flat wages growth as a key reason for its dovish outlook.

Trimmed mean inflation is at 2.6%. The RBA has forecast it will increase to 3.25% this year before levelling off at 2.75% until June 2024. By June 2024, the RBA forecast is that wages will be growing at 3.25%.

RUSSIAN INVASION IMPACT ON PRICES

Asked for his views on the inflationary impact of the Russian-Ukrainian conflict, Harper said that while this would produce a short-term spike in oil prices “this is a relative price increase and not a general price increase.”

“Of course, one can spark the other if there’s a rise in expected inflation over the long term. So far, those expectations are still anchored at 2.5% as is evident in longer term indexed-bond prices as well as surveys. It’s early days but the energy price rises are yet to translate into persistent general price level increases,” he said.