Australia Grapples with Stagflation Risk: RBA Hauser

Australia faces a difficult macro backdrop, with elevated inflation and limited supply capacity raising stagflation risks if energy shocks persist. In a fireside chat, RBA Deputy Governor Andrew Hauser warned of the “nightmare” scenario where inflation accelerates even as growth weakens, complicating policy choices. He noted inflation remains too high, while supply constraints limit the economy’s ability to absorb shocks. A key concern is surging energy prices tied to the Middle East conflict, which Hauser described as a major income shock. Rising costs are eroding household purchasing power and lifting business expenses, threatening growth. At the same time, the RBA is focused on anchoring inflation expectations, cautioning that second-round effects could entrench price pressures. This mix of weak growth risks and persistent inflation leaves the central bank with little scope to ease, reinforcing the need to keep policy restrictive.

Australia’s inflation remains elevated, with excess demand persisting, according to the Reserve Bank’s March minutes. Rising oil prices, driven by Middle East tensions, were flagged as a key near-term inflation driver, lifting short-term expectations, though longer-term ones stayed anchored. Higher energy costs are expected to weigh on growth domestically and globally, though the scale of impact is uncertain. Policymakers noted financial conditions have tightened slightly but questioned how restrictive current settings are. Most members judged further rate hikes likely necessary to return inflation to target, as risks tilt upward. Supply constraints could worsen amid geopolitical developments, adding pressure. Yet demand outlook remains unclear, given Australia’s energy-export role and resilient household balance sheets. Members estimated that if oil prices hold near USD 100 per barrel, headline CPI could rise to about 5% in the June quarter.

A global supply shock from the war in Iran could lift inflation and long-term expectations, particularly as capacity pressures persist, the Reserve Bank of Australia warned. Assistant Governor Chris Kent said in a speech that the shock “could both push short-run neutral rates higher and necessitate a more restrictive stance of policy.” He cautioned that the longer the conflict endures, the greater the economic fallout and risk of asset repricing. Kent explained that a negative supply shock raises prices while weakening activity, “making us all poorer,” and stressed that central banks cannot offset such shocks directly. Their role, he noted, is to prevent initial price surges from embedding into longer-term expectations. The RBA will continue weighing offsetting forces, tighter financial conditions and rising inflation risks, to guide policy aimed at sustaining price stability and full employment over the medium term.