The Reserve Bank fears the rental crisis could add to price pressures in the economy, with governor Philip Lowe warning more interest rate increases may be needed in coming months to bring down inflation.
But after lifting rates 10 times to 3.6 per cent over the past year before holding them steady this month, the bank was willing to take its time reducing inflation so as many people as possible remained employed, Lowe said.
In a National Press Club speech in Sydney on Wednesday, Lowe said the bank had been hearing from financial counsellors who were fielding increasing numbers of calls from people under financial stress.
“A lot of those calls, interestingly, are coming from people who rent,” he said. “Rental stress is at least as big an issue at the moment as mortgage stress.”
Inflation eased to 6.8 per cent in February and the RBA forecasts it will fall back to the top of its 2 to 3 per cent target range by the middle of 2025.
The RBA board on Tuesday kept the official cash rate at 3.6 per cent amid global financial market instability and to assess the impact of its previous 10 rises, but Lowe said that did not mean increases were over.
“The board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable time frame,” he said.
Lowe conceded the RBA’s timeline for reducing inflation was longer than those of other central banks, but the board wanted to ensure the unemployment rate – currently around 50-year lows at 3.5 per cent – did not rise too high.
“We’ve discussed that in our board meetings – whether it’d be beneficial to get inflation back down to 3 per cent a year earlier. There’s argument for that, but it would mean … more job losses,” he said.
“And our judgment at the moment is that if we can get inflation back to 3 per cent by mid-2025, and preserve many of those job gains that have been delivered in the last few years, that’s a better outcome.”
Rental market pressures, which are expected to last for years as population growth outstrips increases in housing supply, could significantly influence inflation figures, Lowe said.
Rents rose 10.1 per cent in the year to March, driven by a surge in unit rents across the major capital cities, according to property analytics group CoreLogic.
The vacancy rate remains at a record low of 1 per cent, with the number of available rentals across the country in the four weeks to April falling below 95,000 – 36 per cent lower than the previous five-year average.
At the same time, population growth has picked up since the international border reopened to migrants. Lowe said the annual rate of population growth would soon reach 2 per cent.
“It takes a long time for housing supply to respond fully to shifts in population growth. In the previous episode of strong population growth during the resources boom, it took nearly five years for housing supply to respond,” Lowe said.
“It’s likely that the balance between demand and supply in the housing market will result in rent inflation being quite high for a while yet, and this will be one of the factors adding to inflation over the period ahead.”
He said it was vital for the bank to ensure inflation did not stay high for a prolonged period.
“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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