Energy prices top of mind for RBA

Volatile energy prices have been added to the Reserve Bank's list of uncertainties as navigating a soft landing for the economy grows increasingly complicated.

RBA Deputy Governor Michele Bullock said the situation in Europe remained clouded in uncertainty.

"While gas prices have declined lately, they are expected to rise again, particularly if there is an unusually cold winter or Russia's war on Ukraine escalates further," she warned.

Speaking in Sydney, Ms Bullock said high global energy prices do boost Australia's export earnings as a major coal and gas exporter, but also put upwards pressure on prices.

The government has flagged regulatory intervention in the energy markets to keep gas and electricity prices down, after the October budget revealed they are expected to soar by a combined 50 per cent over the next two financial years.

Ms Bullock said the bank had built a substantial hike in energy prices into its outlook for the economy, but said "there is a risk we haven't incorporated enough".

"On the other side of the coin, however, global supply chain pressures are easing quite quickly and that could turn out to be more of a dampening force than we are currently expecting."

Skyrocketing rents are another area of inflationary concern, she said. 

Since May, the RBA has been hiking interest rates rapidly in a bid to wrestle inflation under control.

Ms Bullock said there were three other sources of uncertainty threatening to throw its monetary policy strategy off course - the gloomy state of the global economy, household consumption patterns and the threat of a wage price spiral.

She said the downturn in China's property market was particularly concerning and could lead to lower demand for steel and therefore Australia's iron ore.

Outlining the thinking behind the bank's latest set of forecasts revealed last week in its Statement of Monetary Policy, Ms Bullock said there were signs wages were growing more quickly than previously expected. 

"Since the middle of the year, close to half of firms reported realised wage increases of 3–5 per cent, with a further quarter of firms reporting increases above 5 per cent," she said, citing the bank's business liaison program.

As such, the bank revised its forecasts for wages growth - it still sees the wage price index peaking at 3.9 per cent (it is sitting at 2.6 per cent), but sees wages growth accelerating more rapidly.

The recent flooding in NSW, Tasmania and Victoria has also prompted the bank to upgrade inflation forecasts, with the RBA now expecting inflation to peak at 8 per cent.

But early insights from the bank's liaison program suggests the flood damage to farmland may not be as bad as initially thought.

"Encouragingly, contacts in the bank's liaison program have noted that not all crops in affected areas will have been destroyed," Ms Bullock said.

Household spending has also been a major question mark for the RBA, but Ms Bullock said the financial buffers built up during the pandemic were unlikely to keep feeding into elevated spending.

"These sources of support are being eroded to some extent by high inflation, rising interest rates and falling housing prices, and this is expected to contribute to a slowing in consumption growth from early next year," she said.