The nation's unbalanced housing market is looming as a key inflation risk as Reserve Bank of Australia governor Philip Lowe warned of the possibility of further rate hikes despite Tuesday's rates pause.
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Dr Lowe told the National Press Club that while the population is on track to soon grow by 2 per cent a year, long delays in increasing the supply of new homes meant housing shortages were set to persist for years and add to inflation pressures.
The RBA governor said the problem was particularly acute in the rental market, which was significant because rents comprise about 6 per cent of the consumer price index.
"It takes a long time for housing supply to respond fully to shifts in population growth - in the previous episode of strong population growth, it took around five years," he said.
"It is likely that the balance between demand and supply in the housing market will result in rents inflation being quite high for a while."
His remarks follow the publication last week of Australian Bureau of Statistics figures showing housing costs surged 9.9 per cent in the year to February, one of the biggest contributors to the 6.8 per cent lift in inflation over the same period.
In his speech, Dr Lowe echoed arguments mounted by the federal government that wages were were not to blame for the surge in inflation, but also dismissed claims that it was being driven by profiteering, pointing to data showing that the profit share of income had barely changed outside the resources sector.
Instead, the RBA official pointed to supply issues as the primary cause of price pressures, initially because of pandemic-related disruptions to supply chains and Russia's invasion of Ukraine, and more recently the housing and electricity markets and the slowdown in productivity.
"The fact that the supply-side of our economy is growing more slowly than it once did carries the implication that demand also needs to grow more slowly if we are to avoid persistently higher inflation," Dr Lowe said.
"Our job is to make sure that demand grows in line with supply. Over recent times we have been working to slow the growth of demand to establish a better balance with supply."
Dr Lowe said some of the supply issues affecting domestic power prices have abated "somewhat", but the persistence of imbalances in housing markets raised the risk that inflation expectations, and their influence on price setting and wage claims, will increase.
"If this were to occur, a more decisive monetary policy response would be required," he warned.
"While supply-side factors are influencing how fast inflation declines, they cannot be a reason to tolerate higher inflation on an ongoing basis."
Dr Lowe's remarks show that the Reserve Bank is poised to hike rates despite the April pause.
The governor said monetary policy decisions would be taken "month to month" and be based on economic data, particularly developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
Talking down the prospects of easing monetary policy any time soon, the governor said it was "way too early to be talking about interest rate cuts".
Instead, he warned, Tuesday's decision to hold rates steady "does not imply that interest rate increases are over".
"At the moment, we think we may well have to increase interest rates again, but we're not 100 per cent certain of that. The flow of data from month to month will determine whether we need to move higher."
While much has been made of the fact that more than 800,000 mortgages will move from fixed to variable rates during this year, Dr Lowe said borrowers had had significant of warning of the impending change and many had already been preparing for it by building up their funds in offset accounts.
And although mortgage payments repayments are climbing and will consume a record share of almost 10 per cent of household disposable income by the end of 2024, mortgage arrears remained low.
In assessing stress, the governor said the central bank was paying closer attention to the flow of funds into offset accounts, which had slowed as interest rates had increased.