RBA warns banks to maintain lending standards as wages growth strugglesJune 17, 2021
Reserve Bank governor Phil Lowe has sounded a warning to the nation’s lenders to maintain borrowing standards given soaring house prices while dampening expectations of strong wages growth in the wake of the coronavirus pandemic.
Dr Lowe, speaking to the Australian Farm Institute Conference in Toowoomba on Thursday, said the economy including the farm sector was enjoying a “V-shaped” recovery from the pandemic recession.
RBA governor Philip Lowe has warned banks to maintain lending standards while dampening expectations of a surge in wages.Credit:Dominic Lorrimer
But he cautioned the recovery was being underpinned by unprecedented levels of fiscal and monetary policy support, including official interest rates which were at a record low of 0.1 per cent.
Those low interest rates have driven a surge in house prices and household debt. Data this week showed the average price of a house in NSW has now surpassed $1 million, climbing by $115,000 in the past 12 months while in Victoria it has reached $835,000.
Dr Lowe said the Reserve Bank did not target house prices, but added the central bank was paying close attention to the current increase in household borrowing.
“We do though have a strong interest in trends in household borrowing, especially given the already high level of household debt in Australia. It is important that lending standards remain sound in an environment of low interest rates and rising housing prices,” he said.
The Council of Financial Regulators, which includes the RBA, Treasury and the Australian Prudential Regulation Authority, met last week to discuss the issues that could arise if household borrowing “sustainably outpaced growth in household income”.
Dr Lowe said despite the recovery of the jobs market, there was still no sign of a lift in wages.
He said there had been no “upside surprises” to wages growth which the RBA is hoping to drive well above 3 per cent so as to lift inflation.
Even where businesses were struggling to find workers, wage increases were “mostly modest”.
Dr Lowe said although there were a range of reasons for the downward pressure on wages, he noted the impact of the post-global financial crisis mining boom may have had a lasting impact on businesses.
“You might recall that through this period many businesses were saying that Australian costs, including labour costs, were leaving them uncompetitive,” he said.
“This experience has left a lasting imprint on many businesses and it has reinforced the narrative about the importance of cost control.”
Dr Lowe said some businesses may be holding back on plans for expansion while they waited for the re-opening of the nation’s borders. A resumption of migration could then reduce pressure to offer higher wages to workers.
Dr Lowe made clear the RBA would only move on interest rates once it could see wages increasing.
“For inflation to be sustainably in the 2 to 3 per cent range, wage increases will need to be materially higher than they have been recently. Partly for the reasons I talked about earlier, this still seems some way off,” he said.
Dr Lowe said longer term there had to be a lift in economic productivity.
He said while there had been a recent increase in business investment levels it was far short of what was required.
“This pick-up in business investment is welcome, but we have a fair way to go to
reverse the decline in investment over the past decade,” he said.
“If we are to build the capital stock that is needed for a more productive economy and a durable expansion, a further lift in business investment is required.”
Research released on Thursday by the Productivity Commission showed every Australian is $11,500 worse off after a decade of the nation’s economic growth since the 1950s, with commission chair Michael Brennan warning that living standards will continue to fall unless policies change.
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