The RBA cut official interest rates in June, July and October in a bid to drive down the jobless rate and lift wages. But the bank believes unemployment will be around 5.2 per cent this year and only get down to 4.9 per cent by the end of 2021.
Wages are now tipped to grow 2.2 per cent this year, a downgrade from its August forecasts, while further out they will barely lift, with growth of 2.3 per cent expected within two years.
The bank said employment growth would remain relatively strong.
“This is likely to reduce unemployment only gradually, and so spare capacity is expected to remain in the labour market over the next couple of years. Consistent with this outlook, wages growth is low and shows little sign of picking up,” it said.
“Private sector wages growth is expected to remain close to its current rate, having picked up marginally over the past couple of years. In the public sector, wages growth is expected to continue to be constrained by government wages caps.
“Faster wages growth would be needed for inflation to be sustainably within the 2-3 per cent target
The latest forecasts are in stark contrast to those it issued in November last year. Then, it expected the economy to expand 3.3 per cent through 2019, inflation to reach 2.3 per cent and wages to grow by 2.5 per cent. And the RBA believed at the time it would be increasing interest rates rather than taking them to a record low of 0.75 per cent.
The bank left open the door to future interest rate cuts, but revealed the negative impact of falling rates was now a factor to consider.
“The board was mindful that rates were already very low and that each further cut brings closer the
point at which other policy options might come into play,” it said. “It also took into account the possibility that further easing could unintentionally convey an overly negative view of the economic outlook, or that the usual channels of policy transmission might be less effective at low interest rates.”
The report came as Westpac managing director Brian Hartzer told a parliamentary committee in Canberra that the national economy was “relatively soft”. He said the economy was being held up by good prices for key commodities and government spending on infrastructure.
But private business investment was “very weak” while consumer spending was similarly poor.
Mr Hartzer said it was worth the Morrison government thinking about bringing forward its planned 2022-23 tax cuts, adding that more cuts in official interest rates might not help.
“Further cuts may have a perverse effect in terms of economic activity,” he said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.