Wages weigh on rates

THE Reserve Bank is only likely to raise interest rates after an improvement in the slow wages growth that is “diminishing our sense of shared prosperity”, governor Philip Lowe says.

Dr Lowe says low wage growth means inflation is unlikely for now to climb back into the RBA’s target range of 2 per cent to 3 per cent a year.

That was affecting people’s ability to pay off large loans taken out in expectation of future income increases, he said yesterday.

Dr Lowe said any change in the cash rate was still a way off despite promising economic signs.

The RBA last week kept the cash rate at 1.5 per cent for a 22nd consecutive month.

“Whatever weight one places on these various factors constraining wages growth, it is clear that the slow growth in wages is affecting our economy,” Dr Lowe said yesterday at a business lunch hosted by the Australian Industry Group in Melbourne.

“The slow wages growth is diminishing our sense of shared prosperity.”

Dr Lowe said a pick up in wage growth would help put inflation in line with the RBA’s target, help Australians pay down debt, and add to consumers’ sense of prosperity — which had implications for increased consumption.

“There are some signs that wage growth is moving in the right direction, but it is likely to be a gradual process,” he said.

Last week’s economic growth figures showed the Australian economy was moving in the right direction, he said.

The economy expanded 1 per cent in the three months to March and grew 3.1 per cent over the year to March, beating expectations.

“If this continues to be the case, it is likely that the next move in interest rates will be up, not down,” Dr Lowe reiterated. “The board will want to have reasonable confidence that inflation is picking up to be consistent with the medium-term target and that slack in the labour market is lessening.”

His comments came ahead of an announcement due overnight from the US Federal Reserve on interest rates in that nation.

The Fed was expected to modestly lift rates for the second time this year.

Economists said attention would be focused mainly on any hints that the Fed might accelerate its rate hikes in the coming months.

Some economists think the Fed will signal that it expects to raise rates four times this year, up from its current projection of three hikes.

Others believe the central bank will stick with its projection of three rate increases, partly out of concern that rising trade tensions triggered by US President Donald Trump’s policies might slow growth.