The next move for interest rates is up, but the outlook for jobs is good and a wage rise could be around the corner, says Reserve Bank governor Philip Lowe.
But Dr Lowe’s position comes with a warning about the possible impact of a global trade war and the need to be prepared in case of a recession.
He told a parliamentary hearing in Canberra on Friday further progress in growing the economy, which is ticking along at three per cent, is expected.
“If we continue to make progress, you could expect the next move in interest rates to be up,” he said.
The RBA’s cash interest rate hasn’t been raised in eight years, and currently sits at 1.5 per cent.
Australian businesses need to be prepared for a “whole range of circumstances” and be diversified, as risks appear in the global economy, Dr Lowe said.
Uncertainty over global trade – particularly the stoush between the US and China – could become a “more general story”.
“If this were to occur, this could be the channel through which the trade tensions sap the current positive momentum in the global economy,” he said.
Dr Lowe said the US should be doing more to return to budget balance to build “insurance” for the future, but was “doing the exact opposite”.
This made it all the more important for the federal government to put money away for a rainy day.
“It’s been a long time without a recession and one day we will have one, and it will come as a shock,” he said.
A return to budget surplus would help build future capacity to respond to such a downturn, he said, adding: “I’m a big believer in insurance.”
The pick-up in wages growth is expected to be gradual, but the labour market was tightening which could lead to employers competing for workers and pushing up pay packets.
“Firms want to hire workers – now we just need them to pay them a bit more,” he said.
Asked about the banking royal commission, Dr Lowe said he was hopeful financial institutions would turn their focus to customers, rather than sales, and put in place better risk management.
“Sunlight is acting as a very good disinfectant here and we need this disinfectant and it is actually working,” he said of the inquiry.