Rapidly rising rents and high energy prices are key concerns in the Reserve Bank’s fight against inflation as Governor Philip Lowe warned more interest rate hikes may be needed to bring inflation back down.

In a National Press Club Speech in Sydney on Wednesday, Lowe said this week’s board decision to hold the official cash rate at 3.6 per cent did not mean rate increases were over.

Reserve Bank governor Philip Lowe has left the door open to further rate hikes, after the board decided to hold at Tuesday’s meeting.Credit:Michael Quelch

“The board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe,” he said.

Inflation is currently 6.8 per cent, according to the latest monthly consumer price index (CPI) figures from the Australian Bureau of Statistics, and the RBA forecasts it will fall back to the top of its target 2-3 per cent range by 2025.

Lowe said the bank was focused on housing and energy prices as it worked to get inflation down.

“As rents make up 6 per cent of the CPI, what happens here can have a significant influence on overall inflation,” Lowe said.

Growth in the number of homes in Australia has exceeded population growth in recent years, particularly during the pandemic, Lowe said, but there had been only a small increase in the rental vacancy rate.

“This is primarily because the demand for residential floor space increased as people worked from home and the average number of people living in each household fell,” he said.

Population growth has picked up now the international borders have reopened to migrants, and the annual rate of population growth will soon reach 2 per cent, Lowe said.

“In contrast, the expansion in the supply side of the housing market is expected to be fairly modest,” he said.

Pressure on the rental market will ease if the number of people in each household increases, but Lowe said it will not solve the problem by itself.

“Even if this were to happen, 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,” he said.

“This will be one factor adding to inflation over the period ahead.”

A 12 per cent rise in the price of electricity in 202, and an expected increase of 15 per cent this year is also adding to ongoing cost of living pressures, the governor said.

Lowe said it was vital for the bank to make sure inflation does not stay high for a prolonged period of time.

“Persistently high inflation is corrosive and damages our economy. It erodes the value of savings, puts pressure on household budgets and hurts people on low incomes the most,” he said.

“High inflation makes it harder for businesses to plan and it distorts investment. And if inflation becomes ingrained in expectations, it requires even higher interest rates and a larger increase in unemployment to get it back down again.”

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