RBA boss delivers grim warning that Australians are going to be poorer in wake of Iran warfare | UNW

Australians are going to be poorer, face potentially higher interest rates and greater fuel costs, a top RBA staffer has warned.

In a grim update to the Institute of International Finance in Washington on Thursday morning, RBA deputy governor Andrew Hauser conceded there is little the central bank can do over the short term to impact inflation.

He said it was important to quash inflation expectations to stop a repeat of the 1970s, when an oil shock led to surging inflation, while also highlighting the need to communicate the challenges Australia faces.

“Supply shocks are a hard sell to the public,” Mr Hauser said.

“Inflation is going to be higher, activity is going to be low, we’re going to be poorer. There’s not much upside news in that story.

“That’s harder at a time when we’ve had high inflation already, and people are already a bit resentful about that.”

Mr Hauser also took a thinly veiled swipe at federal and state politicians who have increased spending at the same time as the central bank is trying to reduce demand in the economy.

“You need to be clear and direct with people, restate the importance of stabilising inflation,” he said of the RBA’s approach.

“You need to be very clear about what we can’t do because people are now just thinking some monetary policy can solve everything.

“And you need rock solid support from governments at a time when you’re gonna be making hard decisions.”

He said monetary policy was largely limited in the impacts it can have on the Australian economy.

“We have to be clear that what monetary policy can do is anchor inflation and inflation expectations. It can’t deal with the amount of distribution in dollars.

“It can’t make you richer when you’re not richer,” he said.

Mr Chalmers has defended his government’s offering of cost-of-living relief including halving the fuel excise as oil prices soared.

Ahead of the start of the Middle East conflict Australia’s headline inflation rate was 3.7 per cent in February, above the central banks target of the midpoint between 2 to 3 per cent.

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, Australians pay an extra 10 cents at the fuel pump.

“Now, Australians didn’t choose the circumstances of that war, but they are paying a very hefty price for it, and these will be the central considerations of the Budget that we hand down in less than 4 weeks’ time,” Mr Chalmers said on ABC radio.

“We’ve engaged and made a lot of progress on budget repair over the course of the last three and a half years.

“But we’ve acknowledged even before this conflict in the Middle East that there’s more work to do, and people will see some of the fruits of that work in the budget.

Mr Chalmers said the improving budget position allowed the government to respond to any serious scenarios.

Mr Hauser said the Australian economy entered the US/Israel and Iran war with above target inflation, with the subsequent oil shock just adding to rising costs.

Economists predict the conflict has already added 0.2 per cent to cost of living for the March quarter due to rising oil prices.

“Starting conditions matter a lot. In Australia, we went into the Iran shock, already running quite hot, and that created some challenges,” Mr Hauser said.