“Team transitory” does not have many members left in the Anglosphere. The Bank of England is so concerned about inflation that its governor, Andrew Bailey has politely asked the public to stop asking for “large” pay rises. The US Federal Reserve, while slightly slower to raise rates, may not remain that way for long. New Zealand turned towards higher interest rates months ago in an effort to fight inflation. All in all, central banks are increasingly coming to the conclusion that they have to tighten, even if it risks choking off growth and an uplift in wages.
One country, though, is committed to keeping the transitory dream alive. As Philip Lowe, the head of the Reserve Bank of Australia, made clear last week, Australia will hold firm to a 0.1 per cent rate for the foreseeable future in an effort to boost wage growth. He gave no indication of when rate rises may occur, saying that some point in 2022 was possible. But this approach has risks — and not many of them lie within the central bank’s control.
The primary reason Lowe can afford to take a wait-and-see approach is that the country appears to be in a very different position to other members of the Anglosphere. Headline inflation sits at 3.5 per cent in Australia. This is a much lower figure than that seen throughout many other advanced economies. The reason is likely to be Australia’s relatively low wage growth. It is not entirely clear why its wages have failed to rise to the same extent seen in other economies. But it is likely to have much to do with how Australia’s economic response to the pandemic interacted with particular features of its labour market.
The central plank of Australia’s economic strategy to deal with Covid-19 was its version of a furlough scheme that kept many employees attached to their employers and, crucially, existing wage-bargaining agreements. These only come up for renewal in Australia every two to three years. This has meant that workers who may want to negotiate for higher pay have only had the opportunity to do so in dribs and drabs. This has created a “lag” in wage growth that Lowe is determined to make use of: he wants Australia to wait out the inflation that has been imported into the country through pandemic-disrupted supply chains.
Sticking with team transitory is not without risks, however. The most obvious is that Lowe is wrong and inflation takes hold. Most measures of inflation expectations have taken an upward trajectory in Australia and unions have indicated a degree of restlessness. Unemployment rates are low and participation rates are up, which should mean a strong bargaining position for labour when workers do get the opportunity to negotiate for higher wages. Whether this will result in the much-feared wage-price spiral is difficult to tell. Australia has a history of “grand bargains” between unions and government to control wage growth. Whether political conditions will allow for this to be attempted again is another matter entirely.
As Australians look overseas to rising inflation in their Anglosphere counterparts, there is considerable anxiety that they will be unable to avoid the same fate. Lowe admitted there were still many uncertainties. But it is his job to make predictions. In this case, there is much to be gained if he, and the RBA, are correct. Not only will this be beneficial for Australia. It will also offer the world a lesson on whether other central banks may have jumped the gun on tightening. If they are wrong, however, team transitory will have one member fewer to count on.