RBA’s Lowe Continues To Speak Of Wage-Spiral Risks

RBA Governor Lowe has been questioned by the Senate Economics Committee. There was nothing said that would change expectations for the RBA going forward.

• Lowe said that rates had to rise to take back the “insurance” the RBA took out during the pandemic to get them closer to normal and because of demand strength.
• He said that “high inflation to be with us for a number of years” and warned again about the risks of a wage-price spiral. He said that current wages growth continues to be consistent with the inflation target but the RBA doesn’t want it to rise much further. It is comfortable with wages growth in the 3-4% range but there is a risk it could rise too far, although that is not what is expected. He reiterated that productivity growth is needed to boost real wages.
• Inflation is expected to moderate as commodity prices are already down, supply chain issues will resolve, rate rises reduce demand growth. But power prices and rents are expected to put upward pressure on inflation going forward and Lowe pointed out that the government could reduce these pressures by increasing the supply of gas & electricity and of housing.
• Governor Lowe believes that Australia has a better chance of a soft landing than many other countries, as wage inflation is contained so far.
• The October budget is currently not impacting monetary policy. Lowe was mainly concerned about fixing the structural deficit to have flexibility for the next crisis.
• The energy transition could make monetary policy making more difficult in future as it is likely to cause inflation to move around more.
• Lowe pointed to the markets to show that they trust him to contain inflation.