CANBERRA, AAP – Reserve Bank of Australia governor Philip Lowe concedes there are risks to the economy by delaying a rise in interest rates at a time when inflation is accelerating.
But he says there is also a risk of moving too early.
“Australia has the opportunity to secure a lower rate of unemployment than has been the case for some decades,” Dr Lowe told the Australian Financial Review business summit on Wednesday.
“Moving too early could put this at risk.”
The RBA and Treasury are forecasting the unemployment rate to fall below four per cent later this year and remain there in 2023, at a level not seen in almost half a century.
“If we reach this milestone, it would be a significant achievement,” Dr Lowe says.
The jobless rate currently sits at a 13-year low of 4.2 per cent.
The Australian Bureau of Statistics will release its latest payroll jobs report on Thursday, which may give some clues as to what progress is being made on the RBA’s aim. It comes ahead of the full labour force figures for February next week.
The payroll jobs report will cover the fortnight to February 12.
Even so, Dr Lowe believes a rise in the cash rate from its record low 0.1 per cent is plausible later this year, which would be the first increase in over decade.
He warned that inflation could hit at least four per cent this year due to rising global oil and commodity prices due to the war in the Ukraine, and rising food prices locally due to the floods on Australia’s east coast.
But Dr Lowe is yet to be convinced these price pressures will remain and believes “sustainable inflation” can only be assured if wage growth accelerates to three per cent.
Current wage growth at 2.3 per cent, as measured by the wage price index, is still only where it was prior to the COVID-19 pandemic.
“There are certainly pay rises that are much larger than three per cent taking place for some jobs, but the evidence is that most working Australians are still experiencing base wage increases of no more than 2-point-something per cent,” the governor said.
Economists’ predictions for the first rate rise from 0.1 per cent to 0.25 per cent largely range from the June RBA board meeting and the one in August, with key markers being the next two quarterly inflation reports on April 27 and July 27.
It comes as Treasurer Josh Frydenberg warned Australians will pay a cost for tough but “necessary” economic sanctions imposed on Russia over its invasion of Ukraine.
Higher commodity prices and in turn higher inflation can be expected, he told an Australian Financial Review event on Wednesday night.
“Already, European gas prices have nearly tripled, thermal coal prices have nearly doubled and global oil prices have risen by more than a third since the invasion began.”