The Reserve Bank’s deputy governor has warned mortgage holders and businesses the bank is facing “hard choices” in its bid to bring down inflation amid warnings it risks pushing the country into recession.
Andrew Hauser used an event in Sydney on Wednesday to argue the RBA was facing a “central bankers’ nightmare” with signs that some businesses believe an inflation rate of between 3 and 3.5 per cent could be the new norm for Australia – well above the bank’s 2-3 per cent target it has struggled to hit over the past four years.
A key factor is the surge in global oil prices which overnight touched $US110 a barrel. The Reserve, in its most recent set of economic forecasts released in August, had expected oil to be around $US80 a barrel.
Hauser said the nation’s inflation pressures were not improving.
“I don’t know for sure, but a few things are clear, and the inflation outlook looks materially worse than we projected in August,” he said.
“The challenge that’s facing the board and has done for some time is do you do more to tackle higher inflation, recognising that that means weaker activity, weaker labour market,” he said.
“[Or] do we hold our horses to protect the labour market, try and protect some of the labour market … but accept the risk in so doing is that this upside inflation risk embeds, and that becomes more expensive to deal with?
“Those are hard choices; they’re not where we’d like to be ideally as the central bank.”
The comments had an immediate impact on financial markets which had put the chance of a rate rise next month at one in four. They are now closer to 50-50.
Hauser, who sits on the RBA’s interest rate setting committee that will next meet on November 2 and 3, said the war in Iran - and its impact on oil prices - had dragged on far longer than most central banks had been expecting.
This had added to the inflation pressures caused by the AI data centre building boom and overall demand across the economy.
But he noted that the bank’s four rate rises this year were having an impact.
“Monetary policy is working,” he said.
“The labour market is easing, consumption growth is quite tepid, but there are still pockets of growth, and the inflation outlook has deteriorated. So that’s a pretty tricky balance.”
Commonwealth Bank chief economist Luke Yeaman this week warned the Reserve could push the economy “over the edge” if it lifted interest rates to 4.85 per cent at its November meeting.
On Wednesday, Betashares chief economist David Bassanese joined Yeaman in warning the RBA was risking an Australian recession with tight monetary policy.
“The RBA seems increasingly prepared to risk a recession to get inflation down – given it has been above target for an extended period and it is sensing evidence of rising inflation expectations within the community,” he said.
“The RBA – along with other central banks – has likely become less confident the Iran war will end anytime soon and more appreciative of the upside inflation pressures the AI boom is causing, at least in the short term.”
An ongoing concern for the bank has been low productivity growth, prompting demands from the business community for the federal government to put in place measures to boost productivity.
But Hauser, who previously worked with the Bank of England, said local businesses had their role to play.
He said it appeared “something of an Australian thing” to demand the government solve a problem when there had been a sharp fall in business investment over recent years which was probably a factor in low productivity growth.
“There is a joint obligation, I think, not just on government but also on business to get their arms around this productivity challenge and to embrace what could actually be a very positive future for Australia,” he said.
Treasurer Jim Chalmers, in an interview with CNBC, said the war in the Middle East was causing problems for all economies due to its impact on oil prices.
“The war in the Middle East has been pushing up inflation around the world, and in Australia, it’s been weighing on growth around the world and in Australia as well, and pushing up borrowing costs at the same time,” he said.
“So, from an economic point of view, the war in the Middle East has created a very difficult set of conditions for a lot of countries, including ours. You can see it in our inflation, which is a bit higher than we would like. We can see it in our growth. You can see it in other areas as well.”
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