High debt, weak wages a 'sobering combination', warns RBA’s Lowe

RBA Governor Philip Lowe says inflation will only rise slowly but the combination of record high household debt to income when wages were growing slowly was a “sobering combination”.

Speaking at the Australia-Canada Leadership forum, Lowe said “households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination”.

He said “wage growth has been subdued given the ongoing slack in the labour market” and there was “downward pressure on retail prices from intensified competition”.

Although, low level of interest rates means that the debt-servicing burdens are not that high at the moment.

He said with given that outlook, underlying inflation would only increase gradually.

“Our central forecast is for headline inflation to increase to above 2 per cent later this year, boosted by increases in oil and tobacco prices. The increase in underlying inflation is expected to be a bit more gradual.”

The RBA has stuck to its forecast of 3 percent economic growth over the next couple of years. 

“If inflation is low for a long period of time, it is certainly possible that inflation expectations adjust, making it harder to achieve the objective. At the moment though, I don't see a particularly high risk of this in Australia. The recent lift in headline inflation is helpful here and most measures of inflation expectations are within the range seen over recent decades,” he said.

In relation to the risks from additional borrowing, he said it was possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets and hurt the overall economy.  

In summary, Lowe said “flexible inflation targeting with a medium-term focus remains the right monetary policy framework for Australia”.