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RBA advocates patience on rates, wages

 

Australia's central bank expects to keep the cash rate steady for a while as consumers adjust to an extended period of low wage growth that will cap inflation.

Reserve Bank of Australia governor Philip Lowe on Friday said households are coming to terms with lower growth in their real wages, which is likely to have an impact on consumer spending behaviour.

"Many now see this as more than just a temporary development, with wage increases of two-point something per cent now the norm," Dr Lowe told a parliamentary economics committee hearing.

At the same time, consumers are also dealing with higher levels of debt relative to income, even as higher electricity prices affect household budgets.

"This all means that consumer spending behaviour is something we continue to watch carefully," he said.

Annual wage growth in Australia is currently at its slowest ever pace of 1.90 per cent, and the central bank has repeatedly expressed concerns that this will weigh on spending.

The underlying drivers of the slower wage growth in Australia are much the same as the those prevailing overseas, Dr Lowe said.

However, a recent pick-up in employment growth is encouraging, and should help boost incomes.

The RBA will continue to hold its cash rate steady at 1.5 per cent before trending higher, which should support employment growth and a return of inflation to around its average rate of the past couple of decades, Dr Lowe said.

The central bank is prepared to be patient on rates as it seeks to strike a balance between the benefits to the economy of monetary stimulus and the risks associated with rising levels of debt.

"The average level of interest rates will be higher in the future than it is today," Dr Lowe told the committee.

"The current market pricing implies a greater probability of a rate rising than reduction, it also implies that the next move in interest rates is a long way out. I think they are both reasonable assumptions."

Economists widely expect the central bank to lift interest rates by mid-2018.

The Australian economy is chugging along as expected and remains on track to expand at around three per cent a year, the central bank said last week.