By Stella Qiu
SYDNEY (Reuters) -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 a 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 warned.
Lowe refrained from commenting on the interest rate outlook, saying he would leave a query about neutral rates for his successor, deputy governor Michele Bullock, who will become the first woman to take the role.
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.
The Reserve Bank of Australia (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 bank veteran, acknowledged that his seven-year term was defined by the forward guidance in late 2021 that rates were unlikely to increase until 2024, which had been incorrectly called a promise he broke.
"None of us can predict the future and we have had to make decisions under great uncertainty and with incomplete information," said Lowe, adding that with hindsight, policymakers did do too much to stimulate the economy.
The public ire over his rate guidance partly led the government not to extend his term.
"My view is that we will get better outcomes if the public square is filled with facts and nuanced and informed debate, rather than vitriol, personal attacks and clickbait," Lowe added.