New Treasurer Jim Chalmers has warned rising interest rates will have an impact on the economic growth outlook as the Reserve Bank of Australia tries to rein in ballooning inflation.
The central bank has made it clear that interest rates will rise further this coming year after lifting the cash rate for the first time in over a decade earlier this month.
"The Reserve Bank has appropriately been very up front about the interest rate trajectory because we do have skyrocketing inflation, which is expected to get worse before it gets better," Dr Chalmers told reporters in Canberra after having discussions with RBA governor Philip Lowe earlier in the day.
"They will obviously have an impact on the economy."
However, RBA assistant governor for economics Luci Ellis has declined to speculate how high the cash rate might get, particularly at a time when the country and the global economy faces an unusually volatile set of circumstances.
She said inflation around the world has spiked, Australia has a very tight labour market, but real wages are declining at the same time.
In addition, Ukraine and Russia remain at war and parts of China are in lockdown due to COVID-19, which is causing supply disruptions.
"Making a prediction in the light of so many events just seems inappropriate," Dr Ellis said in answer to a question following her address to the Urban Development Institute of Australia national conference.
"The board has already said there's more from here but we will be watching the data and the evidence very carefully and working out what the appropriate action is."
Economists expect the RBA to raise the cash rate at its June 7 board meeting by between 25 to 50 basis points following on from the hike earlier this month, the first increase in over a decade.
That's despite new figures showing construction work remained weak in the March quarter, placing downside risks on economists' already thin projections for growth when the quarterly national accounts are released on June 1.
The Australian Bureau of Statistics said total construction during the March quarter declined 0.9 per cent to $53.7 billion.
Economists had expected a 0.9 per cent increase in the quarter after a downturn in the previous quarter.
The ABS said building work fell 1.3 per cent in the March quarter to $30.1 billion, with residential construction down 0.9 per cent and non-residential off 1.8 per cent.
Engineering work was also down 0.4 per cent at $23.6 billion.
Dr Ellis said there are signs the residential construction industry was at capacity and could not run down its pipeline of work any faster.
She said this had nothing to do with land availability or governments approving enough homes.
"We hear from liaison contacts in the construction industry that delays are common," Dr Ellis said.
"Normally, a detached home takes about six months to build. Currently, they are telling us that it is averaging around nine months."
Some of these delays relate to supply chain disruptions around the world impinging on a range of building materials, especially steel and timber but including everything from tiles to appliances.
"Availability of labour is also an issue, especially in Western Australia, but this is not specific to construction," she said.
Dr Ellis expects the short-term fillip to demand from initiatives such as HomeBuilder and other temporary support measures will work its way out of the pipeline.
"As interest rates increase, the boost to demand from the current low interest rates will also wane and the shifts in demand stemming from the pandemic will have worked their way through," she said.
Australian Associated Press
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