Australia remains well-placed to weather a “perfect storm” of inflationary pressures triggered by the Covid pandemic without resorting to an early raising of the cash rate, although how the labour market responds remains uncertain, the reserve bank governor has told a meeting of economists.

Philip Lowe on Tuesday maintained his view that a recent jump in consumer prices did “not warrant an increase in the cash rate in 2022” as markets have been betting.

“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year,” Lowe said.

There would be a case, though, to lift the cash rate – now at a record low 0.1% – before 2024 as currently flagged by the RBA if the “global inflation shock” turns out to be more persistent than expected.

A key unknown is how quickly the labour market will tighten as swathes of the economy recover from lengthy lockdowns. That could determine how rapidly wages rise and whether they feed expectations of further prices increases to come.

“We are expecting the [economic] recovery to continue and the unemployment rate to trend lower, reaching 4% by the end of 2023,” Lowe said, noting that level hasn’t been seen in Australia for half a century, giving the reserve bank “little historical experience” of how the labour market works at such a low rate.

Mortgage holders and other borrowers are among those listening carefully for any hint from the RBA that rising prices – for used cars to petrol to coffee – will prompt it to lift the cash rate soon. Lowe said there was “a very low probability” the current surge in inflation would trigger an early increase in the official rate.

Australia is far from alone in facing higher inflation. Covid disruptions limiting the supply of some goods and services, combined with pent-up demand from households and businesses alike, are common in many nations.

Lowe, though, was at pains to highlight Australia’s differences with similar market-based economies such as the US.

One difference was the greater disruption to the American workforce because of the pandemic. Labour-force participation there remains about 2 percentage points below pre-pandemic levels.

“In contrast, in Australia, we were hitting record highs for participation just before the Delta outbreak and are expected to return to these highs in the coming months,” Lowe said. Australia’s participation rate perked up 0.3 percentage points in October, nudging the jobless rate temporarily to 5.2%.

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The jobkeeper income-support payments also maintained ongoing links between businesses and employees, unlike the “significant shock” to labour supply experienced in the US, the RBA governor said.

While wages will probably pick up “gradually” in Australia as employers scramble to attract and retain staff, the existence of multi-year enterprise agreements and the annual minimum wage case “impart a degree of inertia” into salary outcomes.

Lowe said that he would be worried if household debt continued to grow at double-digit annual rates but incomes only rose 4-5%.

Australia has also been shielded from some of the higher energy prices stirring inflation in northern hemisphere economies, lately buffeted by wintry blasts. Energy prices in Australia have been trending lower for a number of years, as zero fuel cost renewable sources increase their share of supply.

Among the trends that could throw forecasts off is how Australia’s labour market will change once borders open up. While many potential short-term workers may be attracted to visit Australia, young Australians would also be heading overseas, depleting the domestic labour pool.

Home-bound consumers also spent more on goods than services during the lockdowns at a time when factory output was disrupted. With modern supply chains operating on a ‘just-in-time’ basis with stocks kept to a minimum, it didn’t take a big shift in demand and supply to create the “perfect storm” for pressure on prices.

“Looking ahead, an important question is whether consumption patterns will normalise over time, and if so what effect will this have on prices,” Lowe said on Tuesday.

“There is genuine uncertainty here. It is likely, though, that consumption patterns will return to something more normal,” he said. “This is not only because we can once again consume many services, but also because households are unlikely to make repeat purchases of durable goods.”


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