Reserve Bank governor Philip Lowe had good and bad news for the cohort of Australians who are working and doing so largely to pay off a mortgage.
- RBA governor says an official interest rate hike is very unlikely in 2022 and may still not happen until 2024
- Says many of the factors that have caused inflation and wages to rise sharply elsewhere are “more muted” in Australia
- However, Philip Lowe noted there is great uncertainty around the RBA’s forecasts
The good news first.
“I would like to repeat a point I made a couple of weeks ago – that is, the latest data and forecasts do not warrant an increase in the cash rate in 2022,” he said.
“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year.”
Dr Lowe added that the RBA board was “prepared to be patient”.
So, the good news for borrowers is, even as banks dramatically hike their fixed mortgage rates (Westpac was the latest to do so on Tuesday, for the third time in a month), variable rates that are more directly linked to the current RBA cash rate are likely to stay around record lows for a while longer.
The bad news was the reason why the RBA governor expected interest rates to stay lower for longer.
“Labour force participation in Australia remains high and the wage-setting processes – including multi-year enterprise agreements and the annual minimum wage case – impart a degree of inertia into aggregate wage outcomes,” he explained.
“Our business liaison suggests that most businesses retain a strong cost control mindset and are seeking to use measures other than raising base wages to attract and retain staff.”
How gradual is “gradually”?
“It is likely that wages will need to be growing at 3-point-something per cent to sustain inflation around the middle of the target band,” Dr Lowe added.
The RBA currently doesn’t expect inflation to be at that level until the end of 2023, which is why Dr Lowe thinks it may be able to hold off on raising interest rates until 2024.
Lack of a ‘great resignation’ will keep wage growth lower
It’s a very different story in the US, UK and Europe where both inflation and wages growth are running at multi-year, and in many cases multi-decade, highs.
However, Dr Lowe said things were quite different in Australia.
“Many of the factors that have caused inflation to rise elsewhere are also at play in Australia, though most of these are more muted here.”
Dr Lowe said the stronger wages growth in the US and UK can be largely explained by a persistent fall in the proportion of people either in work or looking for it, a phenomenon that’s been dubbed “the great resignation”.
“In the United States, labour force participation has not yet recovered and is still around 2 percentage points below its pre-pandemic level,” he observed.
But what about the COVID-related supply chain disruptions and surging demand for goods we have been reading much about? Won’t that push up inflation in Australia, even if wages don’t rise faster?
“An important question is whether consumption patterns will normalise over time and, if so, what effect will this have on prices,” Dr Lowe said.
“There is genuine uncertainty here. It is likely, though, that consumption patterns will return to something more normal.
“This is not only because we can once again consume many services, but also because households are unlikely to make repeat purchases of durable goods.”
Even though prices may settle at a higher level than pre-pandemic, if they stop rising then that will also halt inflation in its tracks, Dr Lowe explained.
That is unless workers get uppity in the meantime and successfully demand higher pay packets to compensate for the rise in prices.
“If a period of higher wages growth were to reset wage growth norms, this would have a persistent effect on overall inflation,” Dr Lowe added.
The net result is that interest rates are likely to remain at record lows for a couple more years, that is unless your pay packet starts climbing, in which case the RBA will hope that you’ll be able to afford the extra repayments.
As for how much those extra repayments might be, Dr Lowe is optimistic the cash rate can rise from its emergency low of 0.1 per cent to as high as 3.5 per cent eventually.
“Let’s hope the answer’s at least 2.5 per cent, because that’s what we want to deliver you on inflation on average, so a 2.5 per cent cash rate would be zero real,” he said during the question and answer session.
“I’m hopeful that we can do better than that. The economy should be able to generate at least 1 per cent labour productivity growth so, all this constant, that suggests the positive real interest rate is 3.5 [per cent].”
social experiment by Livio Acerbo #greengroundit #live https://www.abc.net.au/news/2021-11-16/rba-delivers-good-and-bad-news-for-borrowers-with-jobs/100624304