Spending habits and persistent services price inflation remain two major sources of uncertainty for the Reserve Bank in its fight against inflation.
In opening remarks to his last parliamentary economics hearing, RBA governor Philip Lowe said further tightening of interest rates was still possible to ensure inflation returns to target in a reasonable timeframe.
The central bank has hiked interest rates 12 times since May last year but has kept the cash rate on hold for two months in a row, fuelling speculation the peak has been reached.
Dr Lowe noted interest rates had been jacked up a lot in a short period and cash rate movements take time to work through the economy.
He said data flows were encouraging and lined up with Australia travelling down the "narrow path" he had been speaking about for some time.
"That path is one that leads to inflation coming down within a reasonable timeframe and the unemployment rate remaining below the levels of the past 40 years," Dr Lowe said.
But he said there were two main risks complicating this scenario.
The first was household consumption, which on one hand, has been supported by the strong labour market, and on the other, was under pressure from declining real incomes and higher borrowing costs.
"And, while around one million borrowers have already transitioned from low fixed-rate loans to loans with higher interest rates, a similar number will make that transition over the next 18 months," he said.
There was also a risk of services inflation staying high due to "strong demand for services in the wake of the pandemic, stronger growth in nominal wages and incomes and weak productivity growth".
A related concern is the threat of inflation expectations adjusting upwards, although Dr Lowe noted they were well-anchored.
"But the longer inflation stays high, the greater the likelihood that businesses and workers will come to doubt that inflation will return to target and, in response, they will adjust their behaviour,'' he said.
The hearing will be among Dr Lowe's last public appearances as head of the RBA.
Deputy and incoming governor Michele Bullock and other senior officials, also attended the hearing.
© AAP 2023