RBA deputy governor Andrew Hauser warns of a nightmare economic scenario. Picture: NewsWire / Nicholas Eagar
Australian mortgage holders are being warned of a “nightmare scenario” including higher interest rates as the fallout from the Middle East smashes household budgets.
In a fireside chat at the Money Marketeers in New York, Reserve Bank of Australia deputy governor Andrew Hauser warned of the potential fallout from the Middle East oil price shock, as consumer sentiment surveys show Australia’s confidence reaches a record low.
“I don’t think those surveys tell you a lot about what consumption is going to do but, if they are right, we have a big income shock coming our way,” he said
“It is the central bankers nightmare, you know, inflation up, activity down and judging the balance between the two is how we earn our money.”
Stagflation is the worst case scenario for an economy where inflation rises despite spending falling, with the combination creating a complicated policy decision for the RBA.
RBA deputy governor Andrew Hauser warns of a nightmare economic scenario. Picture: NewsWire / Martin Ollman
The RBA boss also warned the Middle East price shock is making it harder for the central bank to get inflation to target between 2 to 3 per cent.
“I wouldn’t say we have high confidence that we’ve set interest rates at the right level because you never do have that high confidence. But we’re going to have to monitor this new shock pretty carefully,” Mr Hauser said.
“I think it’s easy to see that upside inflation pressure. More important for us now is to think through what the medium-term impact might be.”
Mr Hauser warned inflation is “too high” with the energy price spike from The Gulf conflict adding a “big income shock for Australia”.
The conflict between the US/Israel and Iran has led to the blockage of the Strait of Hormuz, a critical waterway where one-fifth of the world’s oil once passed daily.
Rising oil prices is putting pressures on Australian households. Picture: NewsWire / John Appleyard
Before the conflict in the Middle East started six weeks ago oil prices were roughly $US56 ($A80) a barrel, before trading around $US100 ($A143) a barrel.
For every $10 increase in the price of oil, roughly equals 10 cents more Australians pay at the fuel pump.
Prior to the start of the conflict in the Middle East on February 28, Australia’s Consumer Price Index rose to 3.7 per cent in February, down 0.1 per cent from the previous month.
This was above the RBA’s target range of between 2-3 per cent.
Treasurer Jim Chalmers previously warned of modelling of short and long-term fuel disruption scenarios – which showed inflation could near 5 per cent.
He later grimly warned this “look pretty conservative now”.
“We’ve asked for some more, challenging circumstances to be modelled,” he said.
The timing of the war and how long it would take for the economy to “get back on track after the hot part of hostilities” were the main considerations, Mr Chalmers said.
“Those are really the two key variables which play out in all of our scenario planning and all of our modelling,” he said.
Mr Hauser does not predict Australia will enter a recession, even as consumption remains relatively low.
The RBA has lifted interest rates twice this year back to 4.1 per cent, undoing two of the three interest rate cuts from last year, bringing them back to their highest levels since April 2025.
Currently markets are pricing in around a 65 per cent chance of further interest rate pain when the RBA next meets in May – the week before the federal budget is handed down.