REPEAT:MNI RBA: Significant Issue If Wage Growth Stuck At 2%

Repeats Story Initially Transmitted at 02:03 GMT Feb 16/21:03 EST Feb 15

By Sophia Rodrigues

     SYDNEY (MNI) - If wage growth doesn't follow the expected path, it could

cause "significant issue" to the Reserve Bank of Australia's plan to deliver

average inflation of 2.5%, Governor Philip Lowe said Friday.

     Lowe was testifying before the House of Representatives Standing Committee

on Economics, along with Deputy Governor Guy Debelle, Assistant Governor for

Economics Luci Ellis and Assistant Governor for Financial System Michele

Bullock.

     Lowe said the RBA's central scenario is for a further reduction in the

unemployment rate and an increase in inflation towards the mid-point of the

target range.

     That scenario is important because if it pans out, Lowe said "it is more

likely that the next move in interest rates will be up, rather than down."

     But key to the scenario is the extent and pace of progress in reducing the

unemployment rate, because that would determine how quickly wage growth

accelerates, and inflation returns to target. "It is right to identify wage

growth forecast is a risk factor," Lowe said at the testimony. "We cannot

deliver 2.5% inflation if wage growth is stuck at 2%," he said.

     Despite this risk, Lowe maintained his optimism that the RBA will deliver

average inflation rate of 2.5%. He said one of his strategies to achieve that

goal is talking about the benefits of stronger wage growth because he is worried

that people's expectations about wage growth are getting lowered.

     At the same time, the RBA said that wage growth expectations is anchored

around 2.0% and 2.5% and it is not likely to change any time soon. This is the

reason why the RBA expects progress on its employment and inflation goals to be

"only gradual."

     Most of the questions focused around wage growth, company tax rate cut and

employment.

     There was just one question on the level of the exchange rate where Lowe

said that the Australian dollar in trade-weighted terms is within the range of

the last couple of years, which is "manageable."

     But a lower exchange rate would be better than higher, he said -- a comment

he has often made in the past.

     On company tax rate cut, Lowe repeatedly said there is need to keep an eye

on global developments. "The ground is shifting," Lowe said, but didn't offer

his own view except saying that cut in company tax cut could have an impact on

government's budget deficit.

     Lowe reiterated once again the benefit of a sound fiscal policy which could

be relied upon when there is a next downturn in the economy.

     Earlier in the opening statement, Lowe said the news on the Australian

economy in recent months had a more positive tone than it has been for a while.

But against this general backdrop of improving condition, the strength of

consumer spending remains "one uncertainty," he said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com