RBA flags ‘upside risk’ as inflation could rise again in September quarter

Speaking at the Senate estimates hearing at Parliament House on Friday, the RBA chief said the risks to inflation were "balanced on both sides" following higher-than-expected price increases, and with the unemployment rate holding steady at 4.2%.

"Dwelling costs were a little higher than we've expected, and inflation in services was also higher than expected," Gov Bullock said.

"This makes us think that when the September quarter [CPI] comes out, there's some upside risk to our forecast because those things are looking quite a little higher than we thought they would."

Gov Bullock was referring to the latest monthly CPI indicator, which rose 3.0% in the 12 months to August, driven largely by the price rises in housing (up 4.5%).

Trimmed mean rose 3.4% throughout the year to August, following a 3.2% rise in July - both well above the midpoint (2.5%) of the Reserve Bank's target band.

However, Gov Bullock noted that the monthly trimmed mean "is not the same" as the quarterly version.

"You can't just read into the trimmed mean for the monthly and what that might mean for the quarterly," she said

"I'd have to say, in Australia, like many other countries, services inflation does remain sticky… it is being offset by slightly lower goods inflation, but services inflation is still up around 3%."

Energy rebates rolling off, tight labour market could fuel inflation

The RBA expects headline inflation to lift as government energy rebates phase out, while stressing that "what's important is the underlying pulse of inflation", which excludes volatile items.

"The Commonwealth [rebates] have been extended until the end of the year, so that will continue to subtract about a point two from inflation. When they come off, that will get given back," Gov Bullock said.

Another factor posing an upside risk to inflation is Australia's tight labour market.

"We still think it's still possibly a bit tight, particularly in some areas… but we think it can be close-ish to balance," she said.

"If we get a strong pick up in growth, there might be some upside risk."

Despite anticipating the unemployment rate to drift a little bit higher over the rest of the year, the RBA believes the labour market is currently in a "pretty good place".

"At the moment, we're in a situation where we've got inflation back to target, and the key now is to make sure it stays there sustainably," Gov Bullock said.

The September quarter CPI is due out on 29 October, less than a week before the RBA Board convenes for their November monetary policy meeting.

Investors back to the housing market 'not a substantial concern'

Gov Bullock said the rise of investor activity in Australia's property market can "exacerbate the cycle", resulting in more borrowing and higher loan-to-value ratios (LVR).

Despite acknowledging that this "introduces vulnerabilities to the system" she said the central bank does not currently see it manifesting "in a severe way".

"We don't see that at the moment. All we're highlighting is that it needs to be kept an eye on because it can aggravate these cycles," Gov Bullock said.

Instead of attributing rising property prices to investors or monetary policy, Bullock pointed to Australia's chronic housing supply shortage.

"I would not accept that the Reserve Bank is responsible for the housing price issues of this country.

"The problem is the lack of supply relative to demand. Demand outstrips supply, and it's occurring both in housing prices and rent.

"It's not the monetary policy's responsibility to look out for housing prices," she said.

Gov Bullock stressed the need to boost housing supply.

"The government is trying really hard to get it moving, but it does take time. It takes time to get approvals and to build. High-density housing, for instance, takes much longer."

She also said the government's policy to allow first home buyers to purchase a property with 5% deposit through the Australian Government Guarantee Scheme would not pose a risk to financial institutions.

APRA has hinted that it could exercise extra macro-prudential settings should investor lending grow stronger.

"Lower interest rates have historically led to higher credit growth and leverage, higher house prices and often more risky lending," APRA chair John Lonsdale said at the same senate committee. 

"As a result, we are engaging with banks on implementation aspects of different macroprudential tools to manage lending risks, which may include limits on new high debt-to-income lending, or limits on new investor or interest-only loans."

Investor monthly credit growth hit 0.73% at the latest read, the strongest result in more than 10 years; the last time it was this strong, APRA tightened prudential settings for investors.