Reserve Bank Governor Dr Philip Lowe has issued dire warnings and unusually frank policy advice as he faces the prospect of losing his job within days.
As he faces the prospect that Treasurer Jim Chalmers will not give him another seven-year term as the nation’s top banker Dr Lowe on Wednesday outlined the dire consequences of not practising wage restraint and taking some tough decisions.
He said big increases in wages would push up inflation, which the RBA was ‘deadly serious’ about reducing from it current rate of 5.6 per cent to the target range of between 2 to 3 per cent, which has led to 12 rapid interest rate hikes.
In what may be his last public address as Reserve Bank Governor Dr Philip Lowe has issued some dire warnings and frank policy advice
‘If we saw Australia in the same situation as in the US, Canada, and UK where wages are growing at 6 per cent, that would have implications for our setting of monetary policy,’ Dr Lowe told the Economic Society of Australia in Brisbane.
‘We will get inflation back to target, and we’re going a bit slower than others because we want to preserve the gains in the labour market.
‘If it turns out we can’t do that, we will have to take the decision to be tougher.’
This echoes comments Dr Lowe made in June that contradicted Dr Chalmers’ claim higher wages are not fuelling inflation.
Dr Chalmers said last month an 8.6 per cent increase in the minimum wage had not had any impact on interest rates, which have gone up 12 times in the space of a year in order to quell Australia’s runaway inflation.
However, Dr Lowe said ‘compensating’ workers for higher inflation was getting ‘ourselves into trouble’.
‘Because if you accept that premise, and inflation’s seven per cent, wage rises match that, what do you think inflation will be next year?’ he said.
‘It will be high again and then you’ll have to have higher wage increases again.’
Dr Lowe warned that higher wages are likely to be inflationary echoing comments that have seen him attract heavy criticism
It is comments like these that have seen Dr Lowe heavily criticised by MPs and unions and have raised the probability that he will not be re-appointed as RBA boss even though a second-term in the job is normally a given.
Dr Chalmers on Wednesday said the government was considering the next appointment to the RBA governorship ‘in a methodical and measured and considered and consultative way’.
‘This is a decision for the cabinet to take on my recommendation and I take the role of the cabinet and the opinions of my colleagues very seriously,’ the Dr Chalmers said.
During his Wenesday lunch address Dr Lowe also said the high levels of migration into Australia will push up housing prices regardless of interest rates.
Over this and next financial year around 715,000 people are expected to come into Australia on working, student or other longer-stay visas.
All these people coming in have to live somewhere,’ Dr Lowe said.
‘That is pushing up rents and housing prices.
‘We thought housing prices would continue to decline this year but they are not, in Sydney, they are rising quite strongly again, and that is partly due to the influx of immigration.’
Dr Lowe said the nation’s political and business leaders urgently needed to invest in expanding Australia’s capacity to absorb more people and make them productive.
The influx of 715,000 people on longer-stay visas into Australia was something the nation is not adequately prepared for, Dr Lowe argued
‘If we’re going to have a lot more people in the country, which is good, we need the capital stock to support those people, otherwise, the capital/labour ratio declines and that is bad for productivity,’ he said.
‘Population growth brings huge advantages to the country, but we need governments and businesses to keep investing to build a capital stock to support a stronger population.’
At the event Dr Lowe was again forced to defend comments he made during the Covid pandemic that rates were unlikely to rise until 2024, predictions that have seen him for luring people into big mortgages.
Dr Lowe said his comments were the right thing to do during the economic uncertainty of the pandemic.
‘What we are trying to do with our communications is to tell people what we are doing, why we are doing it, the facts we are taking into account,’ he said.
‘During the pandemic, we had a different approach because, at the time, we thought we were in truly dire circumstances. We were explicit about what we thought was the path to interest rates and it turned out we were wrong.’
Treasurer Jim Chalmers (pictured with wife Laura Anderson arrive at June’s Press Gallery Midwinter Ball in Canberra) is deciding Dr Lowe’s fate this week
Asked about whether he wanted to continue as governor Dr Lowe said he would be ‘honoured’ to keep the job.
However, if that did not happen he pledged to do all he could to support his successor.
