A decade of indecision on Australia's energy policy has added uncertainty to the central bank's assessment on whether and by how much inflation will accelerate.
That uncertainty has led to under-building of new supply and a sharp rise in energy prices in recent years, Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said in a speech on Wednesday.
However, that trend had now turned around as a large volume of new renewable energy generation comes online, depressing prices, which would weigh on inflation at least in the near-term.
"High and rising prices are usually a signal to market participants to invest in additional supply," Mr Debelle said in Brisbane.
"However, the pay-off period for new energy generation assets is long, and uncertainty around energy policy has contributed to significant under-investment in new supply."
A plan for a National Energy Guarantee, which aims to bring down electricity prices and ensure supplies following a string of blackouts in 2016 and 2017, is in a limbo and has threatened the prime ministership of Malcolm Turnbull.
"How this plays out over the period ahead is another significant uncertainty for the Bank's inflation forecast," he added.
Earlier this week, Turnbull weakened his centrepiece energy policy, which had included the imposition of a target to reduce green house emissions, an issue that has repeatedly divided the government.
Debelle also noted stiff competition in the country's retail sector, historically low rental growth and the slow pace of wage increases as other causes weighing on inflation, which has undershot the RBA's 2-3 per cent target band for over two years now.
Lukewarm inflation was the single-biggest reason the RBA slashed rates twice to a record-low 1.5 per cent in 2016, and has since stayed on the sidelines awaiting a revival in prices.
"We expect most of these other forces that have contributed to the recent low rate of inflation to abate but there is uncertainty about how much longer they will persist," Debelle said.
"We would like to be more confident that inflation will be sustained at a rate consistent with the target."
