The Reserve Bank of Australia's governor, Philip Lowe was speaking at an event in Melbourne last week. The Central Bank’s chief was optimistic as he expects the unemployment rate in Australia to fall by another half a percentage point while wage growth remained stable.
The comments came after the RBA kept interest rates unchanged at its previous meeting and a day after the RBA’s meeting minutes were released.
The regional unemployment rate in states such as New South Wales and Victoria were at 4.4% and 4.5% respectively while wages were around 2.3% - 2.4%, Lowe said.
"We’re seeing in the two biggest states the unemployment rate around 4.5 percent” and that hasn’t led to wages accelerating, Lowe said. He added that the overall unemployment rate could be around 4.5% without wage growth picking up too much and putting pressure on inflation.
Lowe's comments come amid the unemployment rate in Australia falling to 5.0%. While in the past, this was the full employment level, the jobless rate has been falling below this level in other major economies. As a result, economists view that the total employment rate could be much lower than the current 5.0% threshold.
Lowe said that "Five percent was kind of the conventional estimate coming from various modeling approaches. I never had particular adherence to that as kind of being the true answer."
The basis for a further decline in the unemployment rate came amid some leading indicators suggesting increase demand for labor. This was noted in the RBA's monetary policy meeting minutes from November. Members also pointed out that business investment had picked up, which is seen as a positive for hiring.
The Central Bank has kept interest rates unchanged at record lows of 1.5% for more than two years. This was done to support the economy including supporting firms to increase investment and hiring. The monetary policy's aim is seen to be working as firms begin to offer higher wages to attract more workers.
"We’re gradually inching down and testing how far we can go without wage growth accelerating too quickly," Lowe said, highlighting that the labor market could continue to absorb more slack into the economy.
The RBA governor said that the Central Bank's strategy is to ensure that the labor market tightens for wages to pick up. This, in turn, is expected to put pressure on inflation.
The RBA is seen targeting a 2% - 3% inflation target range and is pinning hopes that the labor market tightening would help the Central Bank to achieve this target.
The RBA expects inflation to rise to 2.75% by 2020. Most of the recent gains in inflation were partly due to the higher fuel prices. However, with the recent decline in the price of international crude oil, inflation could potentially decrease.
Most recent economic data showed that the Australian unemployment rate held steady at 5.0% for two consecutive months. There was also a noticeable increase in the participation rate suggesting that more people were eager to enter the workforce.
However, wage growth has remained somewhat subdued. Officials brushed aside this blip and expect that with wage growth being subdued, there is more scope for the unemployment rate to fall further.
In the U.S. and the United Kingdom, the unemployment rate is at historical lows while wage growth is seen slowly moving higher.
The next RBA meeting is scheduled for in December. However, interest rates are unlikely to be changed any time soon. The markets expect the first-rate hike to come somewhere around the middle to the latter half of next year.