Reserve Bank Governor Philip Lowe has outlined that the federal government should prioritise bringing down the budget deficit to free up more funds to pay for critical services and infrastructure.
Amid a barrage of questions during a House committee on Friday, Dr Lowe urged the Albanese government to look at structural reform to increase the economic pie of funds to draw from.
He noted services such as greater child and aged care cannot be put on the "national credit card" and claimed there are "better ways" to fund these services.
"I do worry how as a community and society we're going to tackle this need to pay for the things that we want as a community [and] the government to deliver for us," he said.
"The best option here is to do structural reform, to have a bigger pie. So there are more resources to pay for aged care disability, get a great education and defence."
The RBA has appeared in front of the parliament during a heightened period of inflation which has spurred the central bank to invoke its most aggressive series of rate hikes since 1994.
Interest rates began rising in May with the current cash rate now standing at 2.35 per cent. The market is also pricing in another 50 basis point hike for October.
Rising interest has fuelled a backlash against the RBA over its forward guidance that rates were to stay low until 2024. However, the governor has hit back at these claims saying it was a guide based on the current economic forecasts during the pandemic.
Dr Lowe during the questioning outlined property prices across the country could fall 10 per cent due to higher interest rates.
"It would not surprise me and this is not a forecast but it would not surprise me if prices came down by [an] accumulative 10 per cent," he said.
Inflation has been caused primarily by supply constraints from COVID-19 and the commodity shocks caused by the Ukrainian conflict.
The governor outlined the bank's core objective was to control inflation as soon as possible, stating higher levels would cause greater damage to the economy and income equality.
Assistant Governor Luci Ellis said central banks around the world got the forecasts wrong in terms of inflation, but highlighted the path of the pandemic during 2020 and 2021 was highly uncertain and unpredictable.
The RBA expects inflation to peak at 7.75 per cent in the December quarter this year and will return to the target range of 2 to 3 per cent by 2024.
Dr Lowe also flagged US inflation as a leading area of concern for the global economy and urged wage growth in Australia needs to be controlled. He highlighted the higher levels of inflation in the US and Europe is being driven by higher wage growth.
In a number of European countries, real incomes have started moving back due to high inflation outpacing wages growth.
"The situation in Europe is very troubling, not least because of the extraordinary increases in energy prices," Dr Lowe said in his opening statement.
"And in the United States, the Federal Reserve has indicated that monetary policy will need to become restrictive to lower inflation."
"It will be difficult for Australia to stay on that narrow path to a soft landing if there is further material bad news on the global economy."
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