The head of the Reserve Bank has issued a warning about weak productivity growth as it continues its fight against high inflation with interest rate hikes.
Philip Lowe told a parliamentary committee that wages growth, in isolation, was not the problem.
"Nominal wage growth has not been a source of inflation, I want to make it clear," he said.
"The problem is weak productivity growth."
Dr Lowe explained that without productivity growth, unit labour costs are high.
"Over the last three years, there has been no increase in the average output produced per hour worked in Australia - no increase for three years," Dr Lowe said.
"It's a problem for the country and it's a problem for the inflation outlook as well."
He said other countries were battling high unit labour costs, but in most places high wage growth, not low productivity growth, was the issue.
The governor said unit labour costs were growing at the rate of around 3.5 to four per cent and that made it hard to bring inflation back to around 2.5 per cent.
"And the best solution to this is a lift in productivity growth."
Dr Lowe said the reasons for weak productivity growth were complex and that the pandemic had a lot to do with it.
"Businesses were in survival mode rather than growth mode and investments slowed down and there were disruptions," he told a Senate estimates hearing.
"That's now behind us. So perhaps we'll now see productivity growth pick up."
He said if productivity growth picks back up to one per cent as it has in the past, wages growth as it's trending at the moment, will not throw the bank off its path to lower inflation.
"If there's no productivity growth, it's hard to have increasing wages."
The central bank started lifting interest rates last year to tackle high inflation.
While past its peak, at seven per cent, inflation remains well above its two-to-three per cent target range.
From May 2022, the RBA lifted interest rates 10 times in a row before pausing in April.
The central bank board then opted to lift interest rates by another 25 basis points in May - a move that few were expecting after keeping rates on hold for just one month.
The RBA will also get an update on inflation via the Australian Bureau of Statistics monthly gauge on Wednesday.
Expectations are for a 6.4 per cent uptick in headline inflation in April, up from 6.3 per cent in March.
© AAP 2023