Warning of a “stagflationary shock” as fuel prices lift inflation expectations
Australia’s interest rates may still be too low to contain inflation, the Reserve Bank’s deputy governor has warned, as a global oil shock driven by the Iran war lifts fuel costs and squeezes confidence.
Speaking in New York earlier this week, Andrew Hauser said interest rates “will have to go to a level that bring inflation back to target.”
“If that means them going higher, it means them going higher,” he said. “I wouldn’t say we have high confidence that we’ve yet set interest rates at the right level, because you never do have high confidence, but we’re going to have to monitor this new shock pretty carefully.”
The comments come about six weeks into the oil shock, which the has pushed up prices at the bowser, lifted inflation and hit both consumer and business sentiment in Australia.
“It’s obvious that inflation is going up in the short term, and people are very conscious of that,” Hauser (pictured right) said. “We are almost wholly reliant on imports for oil and we are the highest user of diesel per capita in the world.”
The cash rate has already risen twice this year, to 3.85% in February and then to 4.1% in March, according to the release. Hauser said there was “not much monetary policy can do” about near-term inflation spikes, with the central bank instead using rates to limit longer-term risks.
He said the key question for the Reserve Bank was how consumer behaviour would feed into the data, and warned of “a big income shock” if activity slowed in line with weakening confidence.
Consumer confidence has fallen since the start of the war, while mortgage repayments and property market resilience face added strain. April’s drop in the Westpac–Melbourne Institute Consumer Sentiment Index was the steepest monthly decline since the onset of the pandemic.
“You don’t want inflation expectations in the medium- to long-term picking up,” Hauser said. “We’re going to have to think about that in that overall game.”
The Reserve Bank is also watching the risk of stagflation — weak activity alongside persistent inflation — with Hauser describing the prospect as a central bank’s worst case. “It is a central banker’s nightmare, the stagflationary shock: inflation up, activity down,” the deputy governor said.
Hauser said the RBA would weigh how much of the oil shock would feed into Australia and whether it would curb growth, ahead of its next cash rate decision on 5 May.
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