The official interest rate is likely to stay low if wages only grow slowly, the Reserve Bank says.
Reserve Bank of Australia deputy governor Philip Lowe says wages grew by just 2.25 per cent over the past year, the slowest in 17 years.
He says if subdued wage growth continues it will keep inflation down and monetary policy will be “accommodative”.
“As the Reserve Bank has indicated for some time, this low inflation outlook provides scope for easier monetary policy should that be appropriate in supporting demand growth in the economy,” Dr Lowe said in a speech to the Urban Development Institute of Australia in Adelaide on Tuesday.
However, he said there was also the possibility of a lag between employment growth and wages.
Dr Lowe said the US economy, where employment has been growing but wages growth was yet to pick up, would be a guide for the central bank.
“Recently, there have been some signs of a pick-up in inflation there and it will be worth watching what happens quite closely over the next few months,” he said.
Dr Lowe said in the meantime the best way to try to lift income was to boost domestic productivity, especially given the weakened momentum in the global economy.
“The task we collectively face, then, is to identify the right specific policies in each of these areas and then find ways of implementing them,” the deputy governor said.
“Clearly, this is not an easy task, but neither is it an impossible one.”
The official interest rate has been held at a record low of two per cent since last May.