SYDNEY Australia's top central banker on Wednesday played down the risks of a sustained rise in domestic inflationary pressures, while cautioning investors against getting carried away in Australia's frothy housing market.
Reserve Bank of Australia (RBA) Governor Glenn Stevens saw enough signs that low rates were working to stimulate demand that a further period of steady policy was likely. Rates have been on hold at a record low of 2.5 percent since August last year.
Stevens omitted any mention of the Australian dollar being too high, though he did note that its trajectory was, as always, a significant source of uncertainty.
The central bank has recently toned down calls for a lower currency, perhaps in part because rising import prices had contributed to a higher-than expected reading for inflation in the fourth quarter of last year.
Yet Stevens saw few signs of serious price pressures given rising unemployment and subdued wages growth.
"We don't see the conditions for persistently higher consumer price inflation, even though tradable goods prices are expected to rise due to the lower exchange rate," Stevens told an investment conference in Hong Kong.
"Our view remains that the outlook for inflation, while a little higher than before, is still consistent with our medium-term target."
He was less sanguine about asset prices, cautioning investors against a debt-fuelled binge of house-buying.
"We are watching this closely, and we remind people that house prices can go down as well as up," said Stevens.
Still, rising house prices were working to drive a much-needed revival in home building, which has been running at a rate below population growth in recent years.
That pick-up would help offset a slowdown in mining investment which was starting to cool after several years of booming growth.
Also helping was a sharp increase in resource exports as all the billions spent on investment led to higher output, added Stevens. He noted that shipments of iron ore had expanded by 85 percent over the past five years.
"So there is encouraging early evidence that the so-called ‘handover' from mining-led demand growth to broader private demand growth is beginning," said Stevens.
"Putting all this together, we think economic growth will continue, and may strengthen a little later this year and pick up further during 2015."
(Reporting by Wayne Cole; Editing by Eric Meijer)