Reserve Bank Governor Dr Philip Lowe has issued dire warnings and unusually frank policy advice as he faces the prospect of job losses within days.
As he faces the prospect that Treasurer Jim Chalmers will not give him another seven-year term as the country’s top banker Dr Low on Wednesday outlined the dire consequences of not exercising wage restraint and taking some tough decisions.
He said the big rise in wages would push up inflation, prompting the RBA to be ‘serious’ about cutting the current rate from 5.6 per cent to a target range of 2 to 3 per cent, leading to 12 quick interest rate hikes. .
Dr Philip Lowe issued some dire warnings and clear policy advice in what could be his last public address as Reserve Bank Governor.
‘If we see Australia in the same situation as America, Canada and the UK where wages are growing at 6 per cent, that will affect our monetary policy,’ Dr Low 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 protect gains in the labor market.
‘If it turns out we can’t do that, then we have to decide to be tougher.’
This echoes comments made by Dr Lowe in June that, contrary to Dr Chalmers’ claims, higher wages do not fuel inflation.
Dr Chalmers said last month’s 8.6 per cent rise in the minimum wage had had no impact on interest rates, which have risen 12 times in a year to tackle Australia’s runaway inflation.
However, Dr Low said, ‘compensating’ workers for high inflation was ‘getting themselves into trouble’.
‘Because if you take that premise, and seven per cent of inflation, matched by wage growth, what do you think inflation will be next year?’ she said.
‘It will be higher again and then you have to raise wages higher again.’
Dr Lowe warned that high wages were likely to echo inflationary comments that had attracted heavy criticism.
Such comments have seen Dr Lowe widely criticized by MPs and unions and likely not to be re-appointed as RBA boss despite being given a second term in the job.
Dr Chalmers said on Wednesday that the government was considering the next appointment to the RBA governorship ‘in a systematic and measured and considered and consultative way’.
‘This is a decision for Cabinet based on my recommendations and I take the role of Cabinet and the views of my colleagues very seriously,’ Dr Chalmers said.
In his lunch address on Wednesday, Dr Low also said higher levels of immigration to Australia would push up housing prices regardless of interest rates.
About 715,000 people are expected to come to Australia on work, student or other long-term visas in this and the next financial year.
All these people have to live somewhere,’ said Dr Low.
‘It’s driving up rents and housing prices.
‘We thought house prices would continue to fall this year but they haven’t, in Sydney, they’re rising quite strongly again, and that’s partly due to immigration flows.’
Dr Low said the country’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 to Australia on overstaying visas was something the nation was not adequately prepared for, Dr Low argued.
‘If we have more people in the country, which is good, we need the capital stock to support those people, otherwise, the capital/labour ratio goes down and that’s bad for productivity,’ he said.
‘Population growth brings huge benefits to the country, but we need governments and businesses to continue to invest in building a capital stock to support a strong population.’
In the event Dr Low was again forced to defend comments he made during the Covid pandemic that rates are unlikely to rise until 2024, predictions which saw him tempt people to take out bigger mortgages.
Dr Low said his comments were the right thing to do during the economic uncertainty of the pandemic.
‘What we’re trying to do with our communication is tell people what we’re doing, why we’re doing it, the facts that we’re taking into account.’
‘During the pandemic, we had a different perspective because, at the time, we thought we were in a really dire situation. We were clear about what we thought was the path for interest rates and it turns out we were wrong.’
Treasurer Jim Chalmers (pictured with wife Laura Anderson at the June Press Gallery Midwinter Ball in Canberra) is deciding Dr Lowe’s fate this week.
Asked if he wanted to continue as governor, Dr Lowe said he would be ‘honoured’ to keep the job.
However, if that doesn’t happen, he promises to do all he can to support his successor.