Dr Lowe, who revealed he no longer had a mortgage on his own home, said people should be careful with their borrowing as interest rates are set to rise.
“The advice I would give people is – make sure you have buffers. Interest rates are going to go up. And the stronger the economy, the better the progress on unemployment, the faster and sooner
rising interest rates will,” he said.
The RBA, which this week announced the end of its quantitative easing program that injected hundreds of billions of dollars into the economy, will release its latest full set of economic forecasts on Friday. Dr Lowe revealed that the bank expects underlying inflation to average 2.75% this year and next.
The bank expects the wage price index to rise 2.75% this year and 3% in 2023, suggesting only a slight increase in real wages for most Australians. Wages have actually fallen in inflation-adjusted terms over the past 12 months.
Unlike many private economists who believe wages will rise rapidly due to the tight jobs market, Dr Lowe said it will take some time for people to benefit from significant wage increases.
“Wage growth has also accelerated, but is only just back to pre-pandemic rates,” he said.
“Further recovery is expected, although there is substantial inertia in the overall wage results, even if there are strong wage increases in some pockets.”
Prime Minister Scott Morrison, who said this week he hoped unemployment would fall below 4% by the end of the year, said on Wednesday the government was focused on containing inflation and interest rates.
“What matters to people and their jobs, what matters to keep the cost of living down, electricity prices are down 8%. What matters is maintaining downward pressure on interest rates,” he said.
Shadow Treasurer Jim Chalmers said stagnant wages had been a feature of the economy over the past decade, making it extremely difficult for ordinary people to get ahead.
“People are saying we want wage growth to pick up as the unemployment rate comes down – we hope that will happen too – but it’s been very stubborn and we don’t know it will,” did he declare.
ANZ economists Adelaide Timbrell and David Plank said it was clear the Reserve Bank was focused on getting unemployment as low as possible before raising interest rates.
“We believe Dr. Lowe’s speech is consistent with our thesis that RBA rate hikes will start later but end higher than market prices,” they said.
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