Supply shocks causing 'central bankers’ nightmare'
Reserve Bank of Australia deputy governor Andrew Hauser has warned that an increasingly frequent wave of supply shocks and growing global fragmentation pose serious challenges for central banks worldwide.
Hauser made the remarks during a panel at the Institute of International Finance Global Outlook Forum in Washington, DC, on Thursday.
A growing list of shocks
Hauser said the catalogue of adverse supply shocks has expanded considerably in recent years, citing COVID-19, the Ukraine conflict, and the Iran shock as key examples, alongside climate change and demographic pressures.
He described adverse supply shocks as “the central bankers’ nightmare”, noting that they simultaneously push inflation higher and drag economic activity lower.
He grouped the challenges into three areas: analysing the shocks, designing the appropriate policy response, and communicating those decisions to the public.
On analysis, Hauser acknowledged that central bank models are better suited to describing demand than supply. “Our models are much better at describing demand than supply, 88 words for snow and none for rain, as it were,” he said.
Policy design under pressure
Hauser said that while central banks cannot influence the first-round inflationary effects of a supply shock, they must carefully assess medium-term impacts and guard against inflation expectations becoming unanchored – a mistake he said was made in the 1970s.
He noted that starting conditions matter, pointing out that Australia entered the Iran shock already running hot, which complicated the policy response. He also cautioned that flexible inflation-targeting frameworks have limits, warning that central banks cannot stretch that flexibility so far that inflation expectations spiral out of control.
The communication challenge
Hauser described public communication during supply shocks as a “hard sell”, saying the message – that inflation will be higher and activity lower – offers little reassurance to households already resentful of prolonged high inflation.
He stressed that central banks must be transparent about what monetary policy can and cannot do. “The things that monetary policy cannot do in these spaces far outweigh the things that we can,” he said.
Fragmentation and financial stability
On financial stability, Hauser pointed to global fragmentation as a deeper and growing concern, describing increasingly separate pools of capital, diverging payment systems, and regulatory competition as compounding risks.
He also cautioned against dismissing risks posed by non-bank financial institutions (NBFIs), drawing on his experience of the liability-driven investment (LDI) crisis in the United Kingdom. “The view that NBFIs can’t blow you up is just wrong,” he noted.
