Philip Lowe in 2023.
(Bloomberg) — Former Australian central bank Governor Philip Lowe said a clouded outlook for the nation’s high unit labor costs suggests the best course for the Reserve Bank is to “sit still.”
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Speaking to Bloomberg Television’s “The China Show” on Thursday, Lowe pointed out that the average cost of labor per unit of output produced has been running at close to 5% for a number of years and that made it tough to achieve 2.5% inflation, the midpoint of the RBA’s 2-3% target.
Lowering unit labor costs is best done by boosting productivity growth, he said. “But if that doesn’t happen, then nominal wage growth has to slow and that probably requires tight monetary policy for a while,” Lowe said in Singapore.
“While they work that out,” the former governor said, referring to the RBA, “it’s best to sit still, just in case it doesn’t slow.”
Lowe, who was attending the Barclays Asia Forum, stepped down as governor just over two years ago. He faced intense political pressure in his final years after giving forward guidance during the pandemic that rates were unlikely to rise from near-zero levels until 2024.
However, a burst of post-Covid inflation forced him to oversee one of the most aggressive tightening campaigns in RBA history. That drew heavy criticism and the bank was subject to an independent review that resulted in a number of changes being implemented. In the end, Lowe wasn’t reappointed in 2023 after a seven-year term and he was replaced by Governor Michele Bullock.
Lowe was asked what he would do at next week’s policy meeting if he was still in the chair. He grinned and responded: “I’m not in the chair, so that’s good.”
He went on to say that “inflation data has spoken” — after a report Wednesday showed consumer prices jumped last quarter — and policymakers are likely to keep rates where they are for a while to see “whether this is an aberration or whether it’s more persistent.”
Asked about the outlook and risks for Australia, Lowe said the economy “seems to have settled into a 2% growth path,” adding that its fundamentals — strong population growth, a AAA credit rating, great natural resources, a fantastic education system and a dynamic and innovative workforce — are positive.
But, he added, business investment has been weak for a number of years and isn’t keeping pace with growth in the population, so that needs to be “re-energized.”
On Australia’s biggest trading partner, Lowe said that longer-term he’s “really optimistic” about China because he’s optimistic about technology.
“In the end it’s technology that drives higher living standards and China, like the US, is making huge investments in new technologies and in the end I think that will drive higher living standards,” he said.
Lowe said in the near-term there are obviously issues with China’s property market, with the shakeout of the sector still having a way to go because while other countries tended to experience a financial crisis and move on fairly quickly, China had taken a different route.
There’s still a lot of stress in the system and that’s weighing on China’s economy but it will run its course, Lowe said, estimating it’s still a couple of years away.
“In the end I’m optimistic about China and that will be good for Australia,” he said.
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