RBA’s Harper: Wages growth of 4.5% to drive inflation up, create conditions for rate hike

Wages growth needs to be "about 4%" to drive inflation sustainably within the central bank’s target range, which will create the conditions for interest rates to rise, Reserve Bank of Australia (RBA) board member and academic Ian Harper said in an interview with MNI on Thursday.

Key quotes

“Wages growth of around 4% should create 1.5% labour productivity growth and drive inflation sustainably into the mid-point of the RBA's 2% to 3% target.”

"Gaining an increase in labour productivity growth to this level is problematic in the short run.”

"Demand is growing strongly, and supply is increasingly constrained so you would expect that nominal wages growth must pick up sometime soon - at least, that's what history would suggest!"

“Trimmed mean inflation is at 2.6%. The RBA has forecast it will increase to 3.25% this year before levelling off at 2.75% until June 2024. By June 2024, the RBA forecast is that wages will be growing at 3.25%.”

When asked about the inflationary impact of the Russian-Ukrainian conflict, Harper said “while this would produce a short-term spike in oil prices "this is a relative price increase and not a general price increase."

"Of course, one can spark the other if there's a rise in expected inflation over the long term. So far, those expectations are still anchored at 2.5% as is evident in longer term indexed-bond prices as well as surveys. It's early days but the energy price rises are yet to translate into persistent general price level increases.”

Market reaction

AUD/USD is back above 0.7300, mainly gaining from soaring oil prices amid the Russia-Ukraine crisis.

The pair was last seen trading at 0.7305, up 0.13% on the day.