Unveiled as the Bank released the minutes of its August board meeting the paper by assistant governor Philip Lowe says Australia “looks to have moved out along the risk-return frontier,” gaining far more from high commodity prices than ever before but facing a much greater risk should they wind back.
Iron ore and coal now account for one third of Australia’s total export income, up from one tenth eight years ago. Almost two thirds of Australian exports go to Asia, with Japan and China getting two-thirds of them, the paper says.
“In the decade ahead it is highly unlikely the rise in the terms of trade will be repeated. This means that if living standards are to continue to rise at the rate we have become accustomed to, productivity growth will need to pick-up significantly,” the paper warns.
Dr Lowe says productivity growth has been close to zero in recent years making current wage rises of 4 per cent per year unsustainable. Over time wages and profits can only climb as fast as productivity and the inflation target combined, which is at the moment around 3 per cent.
The minutes show board members expressed alarm at “weak” productivity growth during the August board meeting noting most of Australia’s recent income growth has been the result of higher export prices... rather than higher production per dollar and worker.
“A significant pick-up in productivity growth would be required to sustain real income growth around the rates seen in recent decades,” the minutes say. “The task facing monetary policy would become more difficult if a continuation of poor productivity growth were combined with an expectation of growth in nominal wages and profits at the same sorts of rates seen over the past two decades.”
The minutes show the board decided against lifting rates in August because of grave concern about financial market turmoil, concluding if turmoil continued household and business confidence could slip further. The decision was unanimous.
As the board meeting took place four days before the United States lost one of its top credit ratings and share markets collapsed, the minutes suggest the board is also unlikely to lift rates at its next meeting, due September 6.
The board does not believe inflation is a problem at present, despite the high headline rate of 3.6 per cent. It expects fruit prices to fall and notes that the Bureau of Statistics is about to rework the consumer price index to exclude an erratic index that has been boosting measured inflation.
But over the medium term it expects wage growth to push inflation up unless productivity improves, necessitating higher rates.
Futures traders wound back their bets on lower interest rates after reading the minutes. Market pricing late yesterday (TUES) factored in a 50 per cent chance of a double rate cut of 0.50 percentage points next month, down from 91 per cent a few days before.
Centrebet cut the payout on no change at the meeting from $1.60 per $1.00 bet to $1.32 as money swung behind the bank keeping rates on hold.
Published in today's SMH and Age
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