Australia’s central bank says a tighter labor market is needed to lift inflation to ‘comfortable levels’

Pedestrians walk past Reserve Bank of Australia (RBA) headquarters in Sydney, Australia on Monday 4 December 2017.

Brendon Thorne | Bloomberg | Getty Images

The Bank of Australia believes it will require a significant and sustained tightening of the labor market to lift inflation to more comfortable levels, a tough task that could take years to achieve.

The minutes from the Australian Reserve Bank (RBA), published in February on Tuesday, showed that the board acknowledged that wage growth had been too subdued for years before the pandemic imposed its own wages.

Companies had responded to the global uncertainty by delaying pay rises or freezing wages, and the bank’s connections suggested it would take some time for such freezes to end.

The government had also responded by limiting public sector wage increases, a trend that could take some time to reverse due to rapidly rising loan burdens.

“A sustained period of labor market austerity would be needed to generate the faster wage growth required for inflation to return to the target range of 2 to 3%,” the board agreed.

The RBA’s own forecast is that underlying inflation will not even reach 2% by mid-2023, which is a major reason why it is not expected to start raising interest rates until 2024 at the earliest.

Prices were reduced to a record low of 0.1% last year as part of a major monetary and fiscal stimulus plan that saw the economy revive much faster than first feared.

House prices have fluctuated sharply across the country and housing construction is booming, helping push unemployment down to 6.6% in December from a high of 7.5%.

Still, the RBA has estimated that the unemployed must have fallen to 4.5% or lower to really make wages grow again.

The central bank also doubled the amount of government bonds it intends to buy this month to $ 200 billion and extended the plan to October.

The RBA estimated that their purchases so far had kept 10-year bond yields 30 basis points lower than they otherwise would have been, and put pressure on borrowing costs across the economy.

It had also kept the Australian dollar “significantly” lower than it would have been if other major central banks made massive own bond purchases.

The RBA board acknowledged that such low interest rates could lead to increased borrowing and rising asset prices, especially on housing.

“The Board of Directors concluded that there were greater benefits to financial stability from a stronger economy, while acknowledging the importance of closely monitoring risk in the asset markets,” the minutes showed.

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