Reserve Bank unlikely to increase interest rates in the 'near term'

Australia’s official interest rate will stay near historical lows for years, the Reserve Bank governor has suggested. Inflation is unlikely to hit 2 percent until the end of 2019.

Reserve Bank of Australia governor Dr Philip Lowe said that officials are yet to determine the new “normal” level of interest rates. Wages growth and inflation are not like what they were used to.

According to Lowe, the bank was flummoxed by the behaviour of wages, given that the unemployment rate is constantly dropping and GDP growth was likely to pick up to roughly 3 percent over 2018 and 2019. Wages, however, remained stagnant with few signs of lifting.

Lowe said he was generally happy with the economy’s shape. The next likely interest rate move would go up if current conditions persists.

On Tuesday, Lowe said at the Australian Business Economists’ annual dinner in Sydney that it was time for a “new narrative” for the economy. He pointed out that the mining investment boom had all but went down, and Queensland and Western Australia’s labour markets had shown signs of improvement.

He said the nation’s unemployment rate at 5.4 percent was heading towards 5 percent, The Guardian reports. The RBA considered that as “full employment.”

Lowe believes the improvement in business conditions led to the solid employment. The number of employed people is increasing by around 3 percent over the past year, said to be the “the fastest rate of increase for some time.” He appeared frustrated at the pace of wages growth and inflation. A distinguishing feature of the country’s recent economic performance, Lowe said, has been the slow growth in wages.

“Growth in average hourly earnings has been weaker still- in trend terms it is running at the lowest rate since at least the 1960s,” he noted, adding that Australia is not the only advanced economy to experience a similar phenomenon with low wages growth.

The bank expects that the increased willingness of businesses to hire more people will push consumer spending growth. In the September quarter, Australians earned a wage hike of only 2 percent. This is comparable to average increases of about 3.5 to 4 percent during the mining investment boom. Lowe said businesses are not bidding up wages as usual partly because they also feel the pressure of increased competition.