By Stella Qiu
SYDNEY The outgoing head of Australia's central bank called on Thursday for a lift in productivity to help return inflation to target, as he delivered wide-ranging policy reflections before his departure this month.
In his speech, Governor Philip Lowe, who is due to step down on Sept. 18., said he had recently focused on the risk that wages and profits could run ahead of levels consistent with inflation returning to target in late 2025.
"While recent data provide some comfort on this front, we need to remain alert to this risk, for, if it were to materialise, inflation would become sticky, which would require tighter monetary policy and more economic pain," he said.
Lifting productivity is fundamentally a political problem, however, Lowe conceded.
"If we can’t build a consensus for changes, the economy will drift and there is a material risk that our living standards will stagnate."
He will hand over the reins of the Reserve Bank of Australia (RBA) to his deputy Michele Bullock, who will become its first female governor.
Lowe has overseen the most aggressive tightening campaign in the bank's modern history, raising interest rates by a whopping 400 basis points since May last year to 4.1% to rein in a post-pandemic surge in inflation.
As he is set to bow out, inflation has retreated from its peak of 7.8% to 4.9% in July and the economy, while slowing to subdued levels, avoided outright contraction, adding to hopes for a soft landing.
"It is possible that Australia can sustain unemployment rates below what we have had over the past 40 years," said Lowe.
The RBA kept interest rates unchanged for a third straight month on Tuesday at the last meeting chaired by Lowe, but retained a warning that some further tightening may still be required to subdue inflation.
Whip-smart and soft-spoken, Lowe, a 43-year veteran of the bank, has been under a cloud since first raising interest rates in May 2022, after having assured borrowers rates were unlikely to increase until 2024.
That culminated in a government decision in July not to extend his term, but elevate his deputy Bullock instead.
(Reporting by Stella Qiu in Sydney; Editing by Alasdair Pal and Clarence Fernandez)