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RBA governor Philip Lowe says wage growth too low, rates to climb but not yet

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RBA governor Philip Lowe has identified low wage growth as one of the key risks to the Australian economy, saying along with high debt and energy prices it was crimping consumer spending.

Dr Lowe also said that interest rates would rise over time, although not for a while.

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“Many people are getting used to lower growth in their real wages,” he told a parliamentary hearing in Melbourne.

“Many now see this as more than just a temporary development, with wage increases of 2 point something per cent now the norm.”

“At the same time, the household sector is also dealing with higher levels of debt relative to income. Higher electricity prices are also affecting household budgets.”

Dr Lowe said wage growth remained at or near record lows despite the success of the economy in creating jobs.

“The fact that it is a common experience across countries suggests some global factors are at work,” he said.

“One possibility is that workers feel a heightened sense of potential competition; either from advances in technology or from international competition. More competition means less opportunity to put your price up. In the case of workers, it means slower rates of increase in wages.”

"Many people are getting used to lower growth in their real wages," RBA governor Philip Lowe told the Senate economics ... “Many people are getting used to lower growth in their real wages,” RBA governor Philip Lowe told the Senate economics committee. Photo: Louie Douvis

“At the same time, many workers feel an increased sense of uncertainty and they feel less secure. It is possible that these effects will pass and that the normal relationship between tighter labour markets and higher wages will reappear. It is also possible that the current environment turns out to be quite persistent.”

“How things turn out on this front is likely to have a significant bearing on the next stage in the global economic cycle.”

Rates to rise, but not yet

Dr Lowe said the next move in interest rates would most most likely be up, but was “quite some time away, if things turn out as we expect”.

He defended the bank’s decision to discuss a neutral interest rate at the July meeting, which triggered a rush on the Australian dollar as investors anticipated Australia following other central banks by raising rates. 

“It might have been handled better but the community now understands that we discuss these issues,” he said. 

The high Australian dollar was weighing on the economic outlook.

“Further appreciation, all else constant, would cause a slower pick-up in inflation and slower progress in reducing unemployment,” he said.

The long-predicted uptick in business investment was taking “longer to occur than expected”.

“While we do see positive signs in parts of the economy, many firms still show some reluctance to commit to significant investment, often citing a range of uncertainties. It is possible that this reluctance will continue for a while yet.

“But it is also possible that the improvement in business conditions that we have seen will give firms the confidence to invest more, after a period of under-investment.

“We have incorporated a middle path into our own forecasts.”

Dr Lowe said the bank’s central scenario was for gross domestic product to grow at an average of about 3 per cent over the next couple of years. That would be “better than we have seen for some time”.

The transition to lower levels of mining investment following the mining investment boom was almost complete.

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