Reserve Bank of Australia (RBA) deputy governor Andrew Hauser has reinforced market expectations that the Reserve Bank may still be forced to lift rates again, warning Australia entered the Iran-linked oil shock with inflation risks already elevated and little room for policymakers to let expectations drift.
Speaking at the Institute of International Finance’s Global Outlook Forum in Washington D.C, the RBA deputy governor said the growing frequency of adverse supply shocks was creating a far tougher environment for central banks, particularly when those shocks simultaneously lifted inflation and weakened activity.
He described that as the core problem now confronting policymakers.
“[T]he adverse supply shock is the central bankers’ nightmare, right? Because it pushes inflation up and it pushes activity down and causes you real challenges in managing that,” Hauser said.
Positioning Australia squarely within that challenge, Hauser said the domestic economy had not entered the latest geopolitical disruption from a position of clear weakness, making the inflation side of the equation harder for the board to ignore.
“Starting conditions matter a lot. In Australia, we went into the Iran shock already running quite hot, and that created some challenges,” he said.
Expanding on the RBA’s likely focus, Hauser said policymakers could do little about the first-round jump in prices from a supply shock, but they did need to assess whether the impact would persist and feed into broader inflation expectations.
He also warned the bank could not stretch “the flexibility in your flexible inflation targeting regime” so far that it allowed expectations to “get out of control”.
Those remarks are likely to reinforce expectations that the board remains more concerned about the risk of inflation becoming re-entrenched than markets had assumed earlier in the year, particularly as the oil shock adds another external pressure point to an already uneasy domestic inflation backdrop.
While Hauser acknowledged the hit to activity was real, he made clear the public should not expect monetary policy to offset the economic damage caused by war-related supply disruptions.
“Supply shocks are a hard sell to the public, inflation is never going to be higher, activity is going to be lower, we’re going to be poorer,” he said. “You need to be very clear what you can’t do, because people are maybe thinking that monetary policy can solve everything.”
Adding another layer to the warning, Hauser said the broader risk was not just the immediate oil shock but a more fragmented global financial system, with increasingly separate pools of capital, payments infrastructure and regulatory regimes raising the possibility that hard-won cross-border stability tools could begin to unwind.
“I think the more substantial financial stability risk that could arise here comes from this broad question of fragmentation,” he said.
Supporting that hawkish interpretation later in the week, AMP chief economist Shane Oliver said the nature of the shock meant the RBA was likely to focus on the inflation impulse before the growth hit, arguing supply-side disruptions historically bias central banks towards tighter settings rather than easier policy.
In his latest weekly market update, Oliver said the RBA was likely to give “primacy to the increased threat to inflation” in the near term and maintained a base case for another rate rise in May.
Bolstering that view, Oliver said consumer inflation expectations had jumped to 5.9 per cent, the highest since 2022, while wage risks and business price pressures had also moved higher, all of which would add to the RBA’s concern that inflation could become more entrenched again.
Although Oliver described the May decision as close, he said AMP still expected another hike and put the probability of a move versus a hold at 60/40, even as market pricing for a hike had climbed to 74 per cent.
Complicating the case for further tightening, Oliver also pointed to a sharp deterioration in sentiment, with Australian shares falling around 0.4 per cent over the week despite stronger offshore markets and both consumer and business confidence weakening as investors absorbed the likely economic fallout.
Deepening the downside risk, Oliver warned Australia remained especially vulnerable because it imports 80–90 per cent of its fuel and estimated that if oil flows through the Strait of Hormuz did not resume quickly, fuel rationing could be required by late next month, materially increasing recession risks.
