Reserve Bank governor Michele Bullock delivered a stark warning to Australian workers on Tuesday: prepare for continued stagnant real wages as the central bank stands ready to raise interest rates even higher to combat inflation that's remained stubbornly above target at 4 per cent.
Speaking to the Anika Foundation in Sydney, Bullock said the RBA would increase the cash rate further if needed to meet its inflation mandate. She didn't mince words about who'd bear the cost. With productivity growth persistently weak for years, workers have already experienced limited growth in real wages, and monetary policy can't fix that fundamental problem.
The Productivity Trap
Bullock identified weak productivity growth as the fundamental challenge facing Australia's economy over the next few years. She warned that without improvement, the economy won't be capable of growing strongly without pushing inflation higher. That limits policymakers' choices and means workers will probably keep experiencing limited growth in real wages even as living costs rise.
The world has become more shock-prone in recent years, she said, and adverse supply shocks constrain growth while reducing real incomes and adding to inflationary pressures. Five months have passed since the United States and Israel began bombing Iran, creating oil price volatility that's complicated monetary policy. While the effect on fuel prices and headline inflation has been smaller than initially feared, headline inflation remained well above target at 4 per cent in May.
Housing Market Feels the Squeeze
The housing market has eased more than the RBA anticipated in May, responding to the changed monetary policy outlook and the cash rate increase earlier this year. Bullock said the easing appeared to reflect recent policy developments affecting the housing market and a general softening in sentiment.
Price declines have been concentrated in Sydney and Melbourne, though prices in those markets remain around where they were before interest rates started rising in February. The most recent data showed negative equity remained very limited, affecting less than 1 per cent of borrowers. Still, Bullock acknowledged the RBA expected property prices to be affected when interest rates rise.
Labour Market Softening
The labour market has also eased more than expected in recent months, with unemployment rising faster than anticipated. The national unemployment rate currently sits at 4.4 per cent, and the RBA is forecasting it to reach 4.6 per cent by the end of next year.
Bullock said some further easing in labour market conditions would likely be required to bring inflation back to target. In other words, the bank probably needs more unemployment or underemployment to achieve its inflation goals. She emphasized that the RBA's job was to keep inflation expectations anchored and ensure shocks don't lead to lasting increases in inflation.
Business confidence in Australia fell sharply at the start of the Iran conflict but has rebounded somewhat over recent months. Bullock noted that Australia's economy is more resilient than in the past because of the adoption of a credible inflation target by the RBA in the 1990s and because the economy has become less dependent on oil than it was in the 1970s.
What mattered for monetary policy, she said, wasn't housing prices themselves but how changes in housing prices affected household spending, investment decisions and, ultimately, inflation. With inflation and capacity pressures already elevated, recent shocks had added further to the inflation impulse. That's why the bank tightened monetary policy earlier this year and remained focused on returning inflation sustainably to target.
Why This Matters:
The Reserve Bank's approach puts working Australians in a vice. On one side, persistently weak productivity growth has already suppressed real wage growth for years. On the other, the central bank is signaling it'll deliberately engineer higher unemployment to bring inflation down. Workers face stagnant wages, rising living costs, and the threat of job losses—all while housing remains unaffordable for many and productivity challenges go unaddressed by monetary policy alone. The RBA's acknowledgment that it can't solve the productivity crisis highlights the need for coordinated government action on skills, infrastructure, and innovation. Without that, the burden of inflation control falls disproportionately on workers through higher unemployment and continued wage stagnation, while structural economic challenges persist.