Reserve Bank deputy governor Andrew Hauser describes high inflation as ‘nightmare’, says oil shock a minefield

Reserve Bank deputy governor Andrew Hauser has described high inflation as a “nightmare” - likening the global oil shock to a minefield with a key consumer confidence reading plunging to the worst level since the early 1990s recession.

Australia’s inflation rate of 3.7 per cent in February, before the US strikes on Iran, was already well above the RBA’s 2-3 per cent target, making an interest rate hike next month a strong possibility.

“Easy to see that upside inflation pressure. More important for us now to think through what that medium-term impact might be,” he told a New York University audience on Tuesday

“It might be still be on the upside, in which case we’re going to have to respond.”

The futures market is expecting another hike on May 5 when the Reserve Bank next meets.

By then, inflation data for March would have been released, with Westpac forecasting a three-year high inflation rate of 4.2 per cent for the first full month of the Middle East conflict.

Dr Hauser’s speech was delivered less than two hours before the Westpac-Melbourne Institute consumer sentiment survey for April produced a score of 80.1 points, which was well below the 100-level where optimists outnumber pessimists, following a 12.5 per cent monthly plunge.

This was an historically low score comparable with the recessions of 1983 and 1991, Westpac’s head of macro-forecasting Matthew Hassan said, with the survey’s 1200 respondents also very pessimistic about the coming 12 months.

“Rate rise fears also look to be shaping consumers’ near-term concerns,” he said.

“The wider inflation consequences of the global energy shock have yet to fully play out locally but clearly add to concerns that the RBA will need to increase interest rates again.”

Dr Hauser noted consumer confidence levels were plummeting in Australia and were lower than during COVID lockdowns, with Westpac now forecasting three more rate hikes that would take the RBA cash rate to an 18-year high of 4.85 per cent.

“For example, consumer confidence indices in Australia have fallen very, very sharply,” he said.

“I don’t think those surveys necessarily tell you a lot about what consumption’s going to do but if they’re right, we have a big, big hump shock coming our way and we’re going to have to think about that.

“It is a central banker’s nightmare, the inflationary shot, inflation up, activity down, judging the balance between those two.”

With inflation soaring as consumer confidence plummets, Dr Hauser likened the situation to stepping around landmines as the world faces the worst oil shock since the 1970s.

“This is a question that central bankers tiptoe like a minefield, and in particular in Australia where this is a very live debate,” he said.

Dr Hauser suggested another rate rise was likely next month to dilute consumer expectations of inflation becoming entrenched at high levels.

“There’s not much monetary policy can do about that other than prevent it from getting to long-term inflation expectations,” he said.

“The big question for us is what it’s going to do to activity and therefore how that’s going to do to inflation over the medium term.

“Inflation is above target and inflation expectations in the short term are picking up.

“You put that all together, it’s obvious that inflation is going up in the short term and people are very conscious of that.”

Businesses are gloomy too with National Australia Bank’s survey for March showing a 29-point fall in a key confidence measure to minus 29 index points, the worst since April 2020 during the onset of the COVID pandemic.

If firms lack confidence, they are less likely to hire staff or invest.

Motorists are now paying more than $3.20 a litre for diesel, which Dr Hauser suggested would have a great effect on Australia’s inflation than most other parts of the world, even if more global demand for Australian liquefied national gas boosted Commonwealth Government tax revenue.

“We are almost wholly reliant on imports for oil and we’re the highest user of diesel per capita in the world,” he said.

“This is a big real income shock for Australia even if national income, fiscal coffers may benefit from that net export position.”