Australia remains well positioned to weather a “perfect storm” of inflationary pressures triggered by the Covid pandemic without resorting to an early increase in the cash rate, although the labor market’s reaction remains uncertain, the governor of the United States said. reserve bank at a meeting of economists.
Philip Lowe maintained his view on Tuesday that a recent rise in consumer prices “did not justify an increase in the cash rate in 2022” as the markets are betting.
“The economy and inflation would need to go very differently from our central scenario for the board to consider an interest rate hike next year,” Lowe said.
It would be appropriate, however, to increase the cash rate – now at a record low of 0.1% – before 2024, as currently reported by the RBA if the “global inflation shock” proves to be more persistent than expected.
A key unknown is how quickly the labor market will tighten as large swathes of the economy recover from long lockdowns. This could determine how quickly wages are rising and whether they fuel expectations of further price increases to come.
“We are waiting for the [economic] the recovery will continue and the unemployment rate will tend to fall, reaching 4% by the end of 2023, ”said Lowe, noting that this level had not been seen in Australia for half a century, giving the reserve bank “little historical experience” of how the labor market operates at such a low rate.
Mortgage holders and other borrowers are among those listening attentively to any hint from the RBA that rising prices – from used cars to gasoline to coffee shops – will prompt it to raise the cash rate soon. Lowe said there was “a very low probability” that the current spike in inflation would trigger a rapid increase in the official rate.
Australia is far from alone in facing higher inflation. Covid disruptions limiting the supply of certain goods and services, combined with pent-up demand from households and businesses, are common in many countries.
Lowe, however, made an effort to highlight Australia’s differences with similar market economies such as the United States.
One difference was the biggest disruption to the U.S. workforce due to the pandemic. Labor force participation remains about 2 percentage points below pre-pandemic levels.
“In contrast, in Australia we were reaching record high turnout levels just before the Delta outbreak and we should return to those highs in the coming months,” Lowe said. Australia’s participation rate rose 0.3 percentage points in October, temporarily pushing the unemployment rate to 5.2%.
Employment maintenance income support payments have also maintained permanent links between businesses and employees, in contrast to the “significant shock” to the labor supply in the United States, the United States said. governor of the RBA.
While wages are likely to increase “gradually” in Australia as employers scramble to attract and retain staff, the existence of multi-year company agreements and the annual minimum wage affair “confer a certain inertia. To salary results.
Lowe said he would be worried if household debt continued to grow at double-digit annual rates, but incomes only increased 4-5%.
Australia has also been shielded from some of the energy price hikes that have caused inflation in northern hemisphere economies, recently rocked by winter blasts. Energy prices in Australia have been trending down for a number of years as zero-cost renewable sources of fuel increase their share of supply.
Among the trends that could skew forecasts are the evolution of the Australian labor market once the borders open. While many potential short-term workers could be attracted to Australia, young Australians would also travel abroad, draining the domestic labor pool.
Homebound consumers also spent more on goods than services during shutdowns at a time when factory production was disrupted. With modern supply chains operating on a “just in time” basis with minimized inventory, it didn’t take a big shift in demand and supply to create the “perfect storm” for pressure. on prices.
“Looking ahead, an important question is whether consumption patterns will normalize over time and, if so, what effect will this have on prices,” Lowe said Tuesday.
“There is real uncertainty here. It is likely, however, that consumption patterns will return to something more normal, ”he said. “This is not only because we can consume many services again, but also because households are unlikely to make repeated purchases of durable goods.”