Productivity Growth Needs To Rise To Meet Inflation Target

RBA Governor Lowe again made it clear that the central bank is resolute in bringing inflation down and that it is damaging and hurts everyone. Monetary policy is restrictive and working but unit labour costs need to come down with higher productivity growth for the Board to meet its target. Lowe believes that the RBA can still tread the “narrow path” but “success is not yet assured” and “vigilance” still required.

• RBA Governor Lowe made it very clear that productivity growth needs to rise because 3.5-4% unit labour cost (ULC) growth is not consistent with inflation at 2.5% inflation. Thus if productivity doesn’t rise towards its 1% historical average, then rates may rise further to bring inflation to target by mid-2025. 4% nominal wage growth is not a problem if there is productivity growth. Lowe was not worried that wages would rise by 5%, like in other countries.
• Lowe reiterated that the central bank is pushing time boundaries and any indication it will be longer will require tighter policy, as can’t risk the onset of an inflation mentality. Expectations remain a concern, as households and businesses are less confident RBA will contain inflation.
• The Board remains very data dependent and ULC are just one of a number of factors that will impact decisions, including services inflation, inflation expectations, global growth, consumption and jobs. It remains concerned about the persistence of services inflation given overseas trends and overall saw risks to inflation skewed to the upside.
• The 2023 budget didn’t change the rate outlook and Lowe saw it as “broadly neutral” for the economy. He said that the energy market intervention was “helpful” and that with rebates would take 0.75pp off inflation and helps to keep inflation expectations down.