RBA Governor Philip Lowe has doubled down on assurances the central bank will not hike interest rates early, despite recent inflation levels hitting the bank's lower target.
In a speech delivered to a Australian Business Economists event on Tuesday, Dr Lowe said the outlook for the labour force and inflation remained highly uncertain, while normal migration patterns and supply flows were still being buffeted by the pandemic.
The captain of Australia's monetary response to the pandemic, claimed wages needed to grow in excess of 3 per cent to ensure inflation sat within its 2 to 3 per cent target band before a move and dismissed rumours it would bow to ongoing pressures to signal a earlier hike.
Australia's rise in headline inflation has partly been spurred on by a 24 per cent rise in the price of petrol over the past year. The latest quarterly consumer price index sits at 3 per cent.
"We still have a way to go," Dr Lowe said. "Underlying inflation has only just returned to the target range for the first time in six years and is only just above the bottom of that target range."
Other central banks including New Zealand and Singapore are expecting a rate rise by the end of 2022, as a result of rising global inflation which has surged in part to rising commodity prices. A number of economic commentators believe the Australian financial market is pricing in a possible hike next year.
The RBA is adamant it would not change the overnight cash rate until inflation was at a sustainable level, a level which Dr Lowe admitted was hard to define.
"It is hard to precisely define what 'sustainably in the target range' means," he said. "But we want to see underlying inflation well within the 2 to 3 per cent range and have a reasonable degree of confidence that it will not fall back again."
The central bank believes a change in the overnight cash rate would not happen until late 2023, or early 2024.
In its monthly minutes, the bank noted wage growth remains key in determining whether the global upswing in inflation would persist.
It also stipulated it expects unemployment by the end of 2023 to reach 4 per cent, with a tighter labour market to support higher wages growth.
Dr Lowe flagged adequate growth in wages would be needed to reach the target inflation band, which would then spark consideration of a change in interest rates.
"Unless labour productivity growth is very weak, it is likely that wages will need to be growing at 3-point-something per cent to sustain inflation around the middle of the target band," he said.
The governor noted nations which were badly impacted by the pandemic are yet to see labour force levels return to pre-virus levels. Dr Lowe pointed out a number of workers would seek to move overseas once international borders fully open, which will influence the labour market that is currently facing a skills shortage.
"There are many young people who haven't had the opportunity to do in the last two years and I expect that we'll see kind of a lot of people want to go and work overseas again. So there'll be reduction labor supply," he said.
Inbound skilled migration is expected to be larger than the outflow of Australians looking to work overseas.
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