Reserve Bank of Australia Governor Philip Lowe warns minimum wage rises could worsen inflation

Australia’s most powerful banker says a big increase in the minimum wage could make inflation worse if everyone else also wanted a generous raise.

Reserve Bank of Australia Governor Philip Lowe warned a generous increase for Australia’s lowest paid was ‘understandable’, provided it didn’t encourage other workers to demand huge pay rises that kept pace with inflation.

Interest rates on Tuesday went up for the 12th time in a year, with the Opposition blaming the big increases on the minimum wages and multi-employer bargaining and Labor continuing to argue Russia’s Ukraine invasion was responsible for high inflation.

‘We’ll get ourselves though into trouble if we accept the premise that all workers need to be compensated,’ Dr Lowe told a Perth breakfast on Wednesday.

‘Because if you accept that premise, and inflation’s seven per cent, wage rises match that, what do you think inflation will be next year? It will be high again and then you’ll have to have higher wage increases again.

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Reserve Bank of Australia Governor Philip Lowe warned a generous increase for Australia’s lowest paid was ‘understandable’, provided it didn’t encourage other workers to demand huge pay rises

‘We’re in a difficult position where the society understandably wants to protect the lowest paid workers but we’ve got to make sure that the higher inflation doesn’t translate into higher wage outcomes for everybody because if that happens the inflation persists and we’ll be in the world that I spoke about before that we’re really trying to avoid.’ 

The Reserve Bank is worried that big wage rises without productivity improvements will see companies pass on the higher costs on to customers, leading to even higher inflation.

‘How much it adds to the inflation outcomes depends on how much it spreads across the rest of the labour market,’ Dr Lowe said.

‘That was just one factor … it is not like we’re just responding to the Fair Work Commission.’

Dr Lowe issued the warning a day after his Reserve Bank board voted to increase interest rates for the 12th time since May 2022, taking the cash rate to a new 11-year high of 4.1 per cent. 

The Fair Work Commission last week gave Australia’s 184,000 workers on the minimum wage an 8.6 per cent increase, from July 1.

While the industrial umpire is independent, Prime Minister Anthony Albanese's government had put in a submission calling for the minimum wage rise to keep up with inflation so the lowest paid didn't suffer a cut in real wages (the Labor  leader is pictured in Vietnam drinking craft beer)

While the industrial umpire is independent, Prime Minister Anthony Albanese’s government had put in a submission calling for the minimum wage rise to keep up with inflation so the lowest paid didn’t suffer a cut in real wages (the Labor  leader is pictured in Vietnam drinking craft beer)

Dr Lowe issued the warning a day after his Reserve Bank board voted to increase interest rates for the 12th time since May 2022, taking the cash rate to a new 11-year high of 4.1 per cent

Dr Lowe issued the warning a day after his Reserve Bank board voted to increase interest rates for the 12th time since May 2022, taking the cash rate to a new 11-year high of 4.1 per cent

This will translate into $70 a week for those working full-time, marking the biggest increase since 1990 for 0.7 per cent of the Australian labour force.

Australian work pay arrangements

MINIMUM WAGE: 0.7 per cent

AWARDS: 23 per cent

COLLECTIVE AGREEMENT OR ENTERPRICE BARGAINIING: 35 per cent

INDIVIDUAL CONTRACT: 41 per cent

Source: Westpac summary of Australian Bureau of Statistics data. Figures are rounded.

The increase was bigger than the seven per cent inflation rate for the March quarter.

While the industrial umpire is independent, Prime Minister Anthony Albanese’s government had put in a submission calling for the minimum wage rise to keep up with inflation so the lowest paid didn’t suffer a cut in real wages.

Another 2.5million workers on national awards are getting a 5.75 per cent increase from next month, with this group making up just under a quarter of the labour force.

More than a third or 35 per cent of Australian workers are on collective enterprise agreements while another 41 per cent are on individual contracts.

Dr Lowe feared these workers could soon demand higher wage increases, with the RBA already expecting the wage price index in 2023 to hit a 14-year high of four per cent.

‘It really depends upon how widespread the larger pay rises are,’ he said.

‘It’s perfectly understandable for the lowest paid workers in the country to be compensated for inflation – it’s tough and we know it’s tough.’

Treasurer Jim Chalmers on Wednesday again said the latest rate rise was ‘not because people on minimum wages are getting paid too much’. 

Treasurer Jim Chalmers on Tuesday refuted the idea the minimum wage rise was responsible for the latest rate rise

Treasurer Jim Chalmers on Tuesday refuted the idea the minimum wage rise was responsible for the latest rate rise

Home Affairs Minister Clare O’Neill rejected a suggestion from Sunrise host Natalie Barr that wages growth was responsible for the latest rate rise, arguing electricity rebates in the Budget would help contain inflation caused by Russia’s Ukraine invasion.

‘Not quite right, Nat,’ she said.

‘The Reserve Bank governor has actually specifically said that the things that the government has done, including that Budget that gave so much cost of living support for families is not driving up inflation.’

But Commonwealth Bank head of Australian economics Gareth Aird on Tuesday said it was ‘primarily’ the cause of the June rate increase.

With Labor also pursing a revival of multi-employer bargaining, shadow treasurer Angus Taylor argued Labor’s industrial relations policies were to blame for the latest rate rise.

‘Let’s be clear, this is Labor’s rate rise. This rate rise belongs to the government,’ he said on Tuesday.

‘It is clear inflation is coming from Canberra, not from the Kremlin, not from anywhere else, but it is coming as a result of a cocktail of policies that we’ve seen from Labor, fiscal policy, energy policy, industrial relations policy, which are combining to create an inflationary fire.’

Labor is continuing to argue global factors like Russia’s Ukraine invasion are keeping inflation high. 

The Fair Work Commission last week gave Australia's 184,000 workers on the minimum wage an 8.6 per cent increase, from July 1. This will translate into $70 a week for those working full-time, marking the biggest increase since 1990 (pictured is a Sydney hospitality worker)

The Fair Work Commission last week gave Australia’s 184,000 workers on the minimum wage an 8.6 per cent increase, from July 1. This will translate into $70 a week for those working full-time, marking the biggest increase since 1990 (pictured is a Sydney hospitality worker)

But Dr Lowe noted on Wednesday Russia’s Ukraine invasion was no longer the chief driver of Australia’s inflation challenge. 

‘Oil prices have reversed much of the increase following Russia’s invasion of Ukraine, as have the prices of many base metals,’ he said on Wednesday.

Monthly inflation data for April showed petrol prices rising by an annual pace of 9.5 per cent, behind holiday travel and accommodation (11.9 per cent), bread and cereals (11.4 per cent) and electricity (15.2 per cent).

Mortgage repayments during the past year have surged by 62 per cent with the 12 rate rises.

A borrower with an average $600,000 mortgage will this month by paying $3,730, a $97 increase compared with May and a $1,424 increase compared with $2,306 in May 2022. 

Dr Lowe’s seven-year term expires on September 17 this year and there’s speculation he could be replaced, after Dr Chalmers launched a review into the RBA which recommended the establishment of a new monetary board specialist board. 

What the latest rate rises means

$500,000: Up $81 a month to $3,108 from $3,027; annual repayments up $14,232 since May 2022

$600,000: Up $97 a month to $3,730 from $3,633; annual repayments up $17,088 since May 2022

$700,000: Up $114 a month to $4,352 from $4,238; annual repayments up $19,932 since May 2022

$800,000: Up $130 a month to $4,973 from $4,843; annual repayments up $22,776 since May 2022 

$900,000: Up $146 a month to $5,595 from $5,449; annual repayments up $25,936 since May 2022

$1,000,000: Up $162 a month to $6,216 from $6,054; annual repayments up $28,476 since May 2022

Monthly repayment increases based on a Commonwealth Bank variable rate rising to 6.34 per cent, up from 6.09 per cent to reflect Reserve Bank cash rate rising to 4.1 per cent, up from 3.85 per cent. Annual repayments for a 30-year loan comparing June increase with early May 2022 when RBA cash rate was 0.1 per cent and variable rate was at 2.29 per cent

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