The RBA continues to be baffled by the combination of low wage growth and low unemployment – but nevertheless, the next move in interest rates will be up rather than down, says governor Philip Lowe.
Speaking at at an Australian Business Economists dinners in Sydney, RBA governor Philip Lowe said Australia's central bank is "still trying to understand" the persistently low wage growth in the country.
The Australian economy, along with much of the developed world, is currently at odds with the historically inverse relationship between unemployment and inflation (known as the Phillips curve).
As a result, there is low wages growth in Australia despite unemployment sitting at a four-year low of 5.6 per cent.
"Many investors judge that this unusual combination of low unemployment and low inflation can persist for quite some time – perhaps, that it is now normal," Mr Lowe said.
"With inflation rates having surprised on the downside for a few years now, there is unusually low compensation for future inflation risk in many financial markets."
While the RBA expects inflation to remain subdued for "some time yet", headline inflation is forecast to eventually move above 2 per cent on a sustained basis, Mr Lowe said.
"We still, though, remain short of full employment, and inflation is expected to pick up only gradually and remain below average for some time yet," he said.
"This means that a continuation of accommodative monetary policy is appropriate. If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down.
"But the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy."
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