The Reserve Bank governor expects to deliver more interest rate hikes this policy cycle, inflicting further pain on mortgage holders.
Philip Lowe said the 3.35 per cent cash rate was unlikely at its peak and further increases would be needed to cool inflation.
“I don’t think we’re at the peak yet but how far they need to go we’re still unsure,” he told a parliamentary hearing in Canberra on Wednesday.
“It’s going to depend upon the inflation data, the resilience of spending, the strength of the global economy and what’s happening with prices and wages.”
Last week, the RBA delivered its ninth cash rate hike to rein in spiralling inflation, which grew 7.8 per cent annually in the December quarter.
National Australia Bank has since updated its cash rate peak forecast from 3.6 per cent to 4.1 per cent in May, which will involve three more 25 basis point increases.
The bank’s economists said there was evidence of resilience to high inflation and interest rates from businesses and consumers and the RBA was conveying a more hawkish approach.
Treasury secretary Steven Kennedy told the parliamentary committee inflation had most likely peaked in the December quarter.
While easing input and freight costs were starting to cool domestic inflation, he said energy and rents were working in the opposite direction.
Rents have been soaring and are expected to keep growing due to constraints on new housing supply and the recovery in migration patterns.
Dr Kennedy anticipates rental prices will continue to rise as tenants reach the end of their leases and are forced to renegotiate, with rental price growth expected to peak in June.
He also said the federal government’s intervention in energy markets would help bring inflation down, with coal and gas price caps expected to reduce inflation by half a percentage point in the 12 months to June 2024.
“Households and businesses will still face substantial increases in energy bills but the package will make a material difference to reducing cost-of-living pressures.”
The top Treasury official also dismissed concerns the federal government’s off-budget funds would fuel the immediate inflation challenge.
Dr Kennedy said the inflationary impact of the new funds in part came down to timing.
“We expect growth to slow significantly over the next year or two – I’d be quite surprised if the establishment of those funds shifted demand in any significant way across that period,” he said.
Deputy opposition leader Sussan Ley said the $45 billion in off-budget spending would put pressure on inflation and therefore interest rates.
Dr Lowe also commented on the role of fiscal policy in managing inflation, noting interest rates were a more nimble tool for managing demand in the economy than government policy.
“Fiscal policy, most of the time, should be dealing with the structural issues and structural budget position, and – except for in extraordinary times – it’s not the best tool to use to manage aggregate demand,” he said.
Poppy Johnston
(Australian Associated Press)
