Reserve Bank deputy governor Andrew Hauser describes high inflation as ‘nightmare’, warns high unemployment
Australians’ confidence in the economy has evaporated under the weight of out-of-control inflation, rising interest rates, fuel shortages and a Middle East war that could disrupt global trade for the rest of the year.A closely followed survey by the Westpac Bank and the Melbourne Institute plunged 12.5 per cent in April, a similar level to recessions in 1983 and 1991 that put hundreds of thousands of people out of work.Businesses are gloomy too, an ominous sign they may cut back investment and send the economy into a recession.Sign up to The Nightly's newsletters.Get the first look at the digital newspaper, curated daily stories and breaking headlines delivered to your inbox.By continuing you agree to our Terms and Privacy Policy.A National Australia Bank survey reported a 29-point fall in a key confidence measure to minus 29 index points in March, the lowest since the onset of the COVID pandemic in early 2020.This was the second-largest fall in the NAB business survey history, with the plunge of a magnitude seen only previously during the Global Financial Crisis and COVID.To save money as fuel prices surge, Qantas Airways said it would cut flights on busy domestic routes during peak times.Westpac reported a big profit fall in its markets division, which was caught by a surge in interest rates as investors around the world factor in higher inflation.Its shares fell more than 2 per cent, dragging down most banking stocks down. Qantas shares fell a third of a per cent.Speaking to investors in the US, Reserve Bank deputy governor Andrew Hauser described high inflation as a “nightmare” — likening the global oil shock to a minefield and warned of higher unemployment as the RBA hikes rates.“Inflation in Australia is too high,” he said. “We all understand that inflation is away from target and the pace with which you bring inflation back will have output and employment consequences.”Westpac’s head of macro-forecasting Matthew Hassan said the bank’s survey of 1200 people taken in April found high levels of pessimism about the coming 12 months and disappointment about family finances now compared with a year ago.“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.”The score of 80.1 points was well below the 100-level where optimists outnumber pessimists. “At 80, the index is back near historical lows, albeit above the extremes seen at the onset of the pandemic and during the recessions of the early 1990s and 1980s,” Mr Hassan said.While unemployment was still low at 4.3 per cent in February, the Westpac survey showed more people were expecting the jobless level to rise over the coming year, marking the worst reading of labour market expectations since the pandemic in 2020.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, with financial markets expecting even more increases in coming months.“(It’s) easy to see that upside inflation pressure. More important for us now to think through what that medium-term impact might be,” Mr Hauser told a New York University audience.“It might be still be on the upside, in which case we’re going to have to respond.”Deputy Governor of the Reserve Bank of Australia Andrew Hauser. Credit: LUKAS COCH/AAPIMAGEThe 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.Mr 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, Mr 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.Mr 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.”Motorists are now paying more than $3.20 a litre for diesel, which Mr 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.”New Commonwealth Bank card spending data released on Tuesday also showed consumers outlaying more on petrol and utilities.“Purchases of discretionary goods were relatively steady, though travel spending was soft. This may be a tentative sign that consumers are being more careful,” economist Ashwin Clarke said.Travel spending fell more in regional areas.
