RBA's Lowe Sees Rates Eventually Rising as His Patience Pays Off

(Bloomberg) -- Australia’s central bank chief said interest rates will likely rise eventually as policy makers’ patience is finally rewarded with unemployment falling sufficiently to spur wage growth and faster inflation.

“We’re not too far away from 2 percent and I think we’ll get there, we’re just not getting there as quickly as we would like to,” Governor Philip Lowe said of reaching the bottom of his inflation target, in response to questions after a speech in Sydney Tuesday. “We’re prepared to be patient. We’re getting there, we’re making progress, we’re patient and we’ll continue to be patient.”

Lowe set out his view that unemployment at a more than four-year low showed the Reserve Bank of Australia is on the right path, adding there are already “pockets” of wage growth in the economy. While Australia’s jobless rate hasn’t fallen as far as the U.S., U.K., Germany and Japan’s, wages remain weak at a time when pay packets Down Under would historically be fattening up.

“I think eventually the forces of supply and demand will win out and wage growth will pick up, it’s just taking time,” he said. “My sense is that wage growth has stabilized at a low level and it’s not going to fall further.”

The Australian dollar climbed to 75.80 U.S. cents at 10:11 p.m. in Sydney from 75.34 cents just before Lowe began his address.

Read more: RBA frets over wage growth in Tuesday’s minutes

The governor also reiterated a comment he made upon first taking the helm last September: RBA officials aren’t “inflation nutters” and were prepared to tolerate weaker consumer-price growth for a period to ensure the Australian economy remains stable.

“If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down,” Lowe said in his speech to the Australian Business Economists’ annual dinner. “But the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy. We will, of course, continue to keep that judgement under review.”

Questioned on the value of keeping rates at a record-low 1.5 percent for the past 15 months, given the asset-price inflation and wealth inequality that had generated, Lowe countered that this was a trade-off for the jobs created under such conditions. Unemployment in Australia currently stands at 5.4 percent, down from 5.9 percent earlier in the year.

In his earlier speech that reflected on the key questions the RBA grappled with as it sought to understand what was now considered “normal” in Australia’s economy, Lowe also said:

• The wind-down of mining investment is now all but complete, with work soon to be finished on some of the large liquefied natural gas projects
• The fading of “negative spillovers” from the unwinding of mining investment is one reason why growth in Australia’s economy is expected to strengthen over the period ahead; another is the higher volume of resource exports due to the investment
• On business investment, “it’s too early to say that animal spirits have returned with gusto.” But more firms are reporting that economic conditions have improved and more are now prepared to take a risk and invest in new assets
• The pick-up in jobs has been strongest in household services and construction industries
• At the same time, though, growth in consumer spending remains fairly soft; indeed, for a number of years consumption growth has been weaker than originally forecast
• Whereas in earlier years, Australians had got used to average wage increases of around the 3.5 to 4 percent mark, 2 to 2.5 percent is now the norm. Growth in average hourly earnings has been weaker still: in trend terms it is running at the lowest rate since at least the 1960s
• Many workers feel there is more competition out there, sometimes from workers overseas and sometimes because of advances in technology
• Businesses are not bidding up wages in the way they might once have. This is partly because business, too, feels the pressure of increased competition
• Competition from new entrants is putting pressure on margins and forcing existing retailers to find ways to lower their cost structures. Technology is helping them to do this, including by automating processes and streamlining logistics; the result is lower prices
• The impact of greater competition on consumer prices still has some way to go as both retailers and wholesalers adjust their business models; this is likely to be a constraining factor on inflation for a while yet

“It is plausible that, at least for a while, the economy is less inflation prone than it once was,” Lowe said. “Both workers and firms feel more competition, and it is plausible that the wage- and price-setting processes are adjusting in response.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke

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