philip-lowe
Reserve Bank of Australia governor Philip Lowe (Image: AAP/Joel Carrett)

The Reserve Bank governor Philip Lowe yesterday laid out a very clear path for what has to happen to get Australia back to something like economic normality -- and for the bank to exit its new program of quantitative easing.

The board will not increase the cash rate until actual inflation is sustainably within the target range. It is not enough for inflation to be forecast to be in the target range. For inflation to be sustainably within the target range, wage growth will have to be materially higher than it is currently. This will require a lower rate of unemployment and a return to a tight labour market. On the current outlook, it will take some years to get there.

The logic is clear: inflation (actual inflation) will drive monetary policy, but actual inflation will need wages growth, and wages growth won't happen until we reach a "tight labour market". That is likely around 5%, experts now say -- though when we were last at 5% unemployment, the dial on wages growth didn't shift.