Rising rents and energy prices key concerns for RBA on inflation watch

Rapidly rising rents and high energy prices are key concerns in the Reserve Bank’s fight against increasing cost pressures 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 he was troubled by the pressure on renters, as vacancy rates remain around record lows and rents continue to skyrocket.

The bank had been hearing from financial counsellors who said they had been getting more and more calls from people in financial stress, he said.

“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.”

Lowe said he was meeting with several service providers in the next month to hear those rental stress stories directly.

“Quite a few Australians write to me telling them the very difficult situation that they’re in and I read those letters with a heavy heart. But when I read them, I think, ‘what is the alternative?’ ” he said.

The RBA board on Tuesday held the official cash rate at 3.6 per cent. But Lowe said that did not mean rate 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 timeframe,” he said.

Inflation is currently 6.8 per cent, according to the latest Australian Bureau of Statistics figures, and the RBA forecasts it will fall back to the top of its target 2 to 3 per cent target 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 had 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.

Rents rose 10.1 per cent in the 12 months to March, according to CoreLogic, driven by a surge in unit rents across the major capital cities. The vacancy rate remains at a record low of 1 per cent, with the number of available rentals in the four weeks to April falling below 95,000 around the country – 36 per cent below the previous five-year average.

Population growth had picked up now the international border had reopened to migrants, and the annual rate of population growth would 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 would ease if the number of people in each household increased, but Lowe said it would 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 2022, and an expected increase of 15 per cent this year were also adding to ongoing cost-of-living pressures, the governor said.

Lowe said it was vital for the bank to make sure inflation did 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.”