Philip Lowe has sought to put a lid on wages growth of about 3.5 per cent and warned regular pay rises of 4 per cent to 5 per cent risk entrenching higher inflation.
Dr Lowe said inflation would remain above the target band for “years” and the RBA would do “what is necessary” to pull it down.And while pay rises above 3.5 per cent “for a short period of time” were possible, he warned a wage price spiral would force aggressive rate rises that slow the economy and push unemployment higher.
A similar outcome in coming months would mean interest rates would need to go much higher than otherwise and spark an economic downturn to get inflation under control. “I’m hopeful we can avoid that,” he said.In the meantime, interest rates will keep rising, including by a quarter or half-a-percentage point interest rate increase in July and more following.
“Firms had become more willing to pass on cost increases to consumers and, in a tight labour market, employees were demanding higher wages as compensation for higher living costs,” the board minutes said. He said he would leave it to others to judge whether market pricing for a 4 per cent cash rate by December was “reasonable”.
“If it did, the period of higher inflation would persist, and it would be more costly to reverse,” he said, adding that to date expectations had not shifted markedly from the 2 per cent to 3 per cent annual target.
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