Rba's hauser warns of 'central banker's nightmare' as aussie consumer confidence crashes

Australia's central bankers face a daunting challenge as soaring fuel prices and inflation squeeze household budgets, with consumer confidence plummeting to a multi-year low.

Stagflationary shock tests rba's judgement

Reserve Bank of Australia Deputy Governor Andrew Hauser described the economic situation as a 'central banker's nightmare', with inflation rising while economic activity slows and unemployment climbs. This 'stagflationary shock' poses a tricky dilemma for policymakers, as interest rate hikes to combat inflation could further dent growth.

Hauser's comments came as Westpac's monthly survey revealed a sharp 13% decline in consumer confidence to 80 points, its lowest level since the early 1990s recession and the initial Covid-19 outbreak. The drop was largely driven by the twin impacts of higher fuel costs and interest rates, with Australians facing another 'cost of living shock', according to Westpac senior economist Matthew Hassan.

The confidence index's sharp deterioration suggests consumers are bracing for an extended period of economic weakness, similar to the 2022-24 inflation fight, Hassan warned. With unleaded petrol prices up 30-40% in March and diesel costs nearing 80%, economists predict inflation will jump to 4.6% in the year to March, nearly double the RBA's 2.5% target.

Hassan said the fuel excise cut announced by the government was unlikely to ease consumers' financial strain, given the scale of the price hikes. The survey results have fueled expectations of a third consecutive interest rate hike at the RBA's May meeting, with markets pricing in a 64% chance of a rate increase.

Hauser acknowledged that inflation was already 'too high' ahead of the Middle East conflict, but emphasized the need to consider the medium-term impact on the Economy. If activity continues to slow, the RBA may need to rethink its monetary policy stance, he suggested.