Australians face more interest pain, and a likely significant drop in house prices, the Reserve Bank boss has warned.

Philip Lowe said both were likely without any immediate significant growth in wages, as that would lead to a wage-price cycle with higher inflation bringing higher wages that subsequently drove even consumer price rises.

“This type of cycle would lead to higher interest rates, a weaker economy and higher unemployment,” Dr Lowe told the House of Representatives Standing Committee on Economics in Canberra on Friday.

Dr Lowe said the RBA will keep lifting interest rates, although the recent rapid pace of rises was likely to slow. He was confident the economy could absorb the rises.

“[At] 2.35 [per cent], I think the rate is still too low,” he said.

Over the longer term, the cash rate “should at least average the mid point of the inflation target”, which is 2.5 per cent, if not higher, Dr Lowe said.

He believes an average interest rate of about 3 per cent is “possible”.

“I think we’ll cycle around some number between 2.5 and 3.5 [per cent],” he said.

Since May, the RBA has lifted its cash rate target from 0.1 per cent to 2.35 per cent. The repeated rises have added more than $600 a month to the average mortgage holder’s monthly repayments.

Dr Lowe also defended the bank’s earlier commitment to low interest rates until 2024.

“I’m frequently reminded that many people interpreted our previous communication as a promise or as a commitment that interest rates would not increase until 2024 – this was despite our statements on interest rates always being conditional on the state of the economy,” he said.

Future cash rate decisions would depend on inflation expectations and how general inflation psychology evolved in Australia, he said.

Dr Lowe warned businesses not to contribute to soaring inflation by taking home oversized profits. He said elevated profit margins could become a major contributor to inflation.

Dr Lowe said there were three broad drivers of inflation – higher input prices, higher wages and higher profit margins.

“Today, [inflation] is largely from higher input costs,” he told the committee.

“There’s some pickup in wages but that’s not driving inflation – and I think in some industries there has been an increase in margins.”

He said he wouldn’t be surprised if Australian house prices fell by an average of 10 per cent. However, he said it was unlikely they would return to pre-pandemic levels, given the level of growth in the past two years.

“It’s hard to forecast asset prices and prices went up 25 per cent over the past two years – a very, very big increase,” Dr Lowe said.

“It would not surprise me – and this is not a forecast – but it would not surprise me if prices came down by 10 per cent. And even if they did that they’re still up 15 per cent over three years.”

Dr Lowe said the troubles facing the global economy made it harder for the Reserve Bank to navigate a soft landing for the Australian economy.

He said higher-than-expected inflation figures in the US and deteriorating economic conditions in Europe and China made it difficult to return inflation to the 2-3 per cent target and keep the economy on an “even keel”.

“I think it is possible to achieve this but the path here is a narrow one and it’s clouded in uncertainty,” he said.

Earlier, Dr Lowe used his opening speech to address concerns about the RBA’s response to pandemic-era challenges.

“In those dark days of the pandemic, the Reserve Bank board judged that the bigger policy mistake would have been to do too little rather than too much,” he said.

“If the worst had occurred, Australians would have paid a heavy price.”

-with AAP