New Governor offers explanations for the economy in first outing

Philip Lowe, the new Governor of the Reserve Bank of Australia hit the public scene for the first time in his new role, in mid-October. With inflation, both globally and at home largely below twenty year averages, the Governor was keen to set the scene and explain why this was the case. The published version of the speech, excitingly titled ‘Inflation and Monetary Policy’ addressed “…quite a different world to the one that has existed over the past half-century.” And more’s the point, Governor Lowe also addressed the RBA Board’s thinking on monetary policy in recent times.

In lecturing mode, the Governor presented the data that indicates Australia has joined the club of mainly developed countries that have been experiencing lower than average inflation over the last few years. The chart below shows Australia and other countries’ annual inflation rate averaged for the last two years and compared with (the black dots) the average over the last twenty years.


Some countries, of course, have been in low inflation territory for some time. Japan is an example. Others, like Australia, joined that club only recently.

Governor Lowe recorded the orthodox view of the causes of systemic low inflation. Slack in the economy, or excess capacity, reduces pressure on pricing in a classic demand and supply imbalance. He pointed to measures of labour utilization as potential evidence (see elsewhere in this edition of Statistics Count) for discussion on underemployment of labour resources).

The speech also addressed lower commodity prices, including lower global oil prices and the manner in which they have resulted in many workers agreeing to smaller wage increases than was once typically the case. 

Lower wages outcomes feed back into lower prices growth and therefore, lower inflation. Governor Lowe indicated RBA staff considers that Australia’s 5.6% unemployment rate indicates there is excess capacity in the labour market, without taking into account part time workers who want more hours.

However, the Governor dwelt upon a third but inter-related factor that appears to be contributing to lower inflation. He described it as:

“…a shift in the perceived pricing power of many workers and businesses.”

While conceding this could be a function of the earlier points, he preferred the argument that:

“…there is something more structural going on, driven by the globalization of markets and technology.”

Governor Lowe considers that rapid information exchanges and open trade borders increases competition and can expose economies that are not simply lowest cost. Coupled with the residual scars of the global financial crisis, they go some way to explaining why inflation is so low.

The Governor suggested the best evidence of all these developments in the macro economy was wages price growth, which increased just above 2% in the last year, the slowest rate since at least 1990, as the chart below shows.


Coupling this with research being conducted by the RBA and the Australian Bureau of Statistics (ABS), Governor Lowe indicated that the size of wage increases was lower and their frequency was declining, with the majority of workers receiving lower wages increases than was the case half a decade ago. The following chart shows the frequency and size of wage increases.


The result is that perceptions of prices growth, measured as the inflation expectation, have also lowered. No surprises in the chart below, given the people being surveyed are those whose incomes have not been growing as fast as was once the case.


Governor Lowe also discussed the inflation targeting strategy of the RBA Board. The emphasis is on maintaining an average inflation rate of between 2% and 3% per annum. That is to say, the rate might be higher and it might be lower, but over the medium term, it ought average in that range. In the shorter term – and consistent with its legislative obligation – the RBA considers employment and financial system stability to be its other obligations, and thus it manages inflation, in part, for them.

Philip Lowe provided examples of specific RBA Board decisions and the drivers behind them, in this, his first outing. 

The full text of the speech is available at