RBA watches business price rises closely as hikes loom
The Federal Reserve may be forced to raise interest rates further if companies are able to absorb the costs of the Iran war more than previously thought, a senior official said.
During a fireside chat in New York City on Tuesday morning, AEST, deputy governor Andrew Hauser said the central bank was still “trying to work its way through” the energy shock and what it means for inflation.
After already very high inflation was further increased by the US-Israeli attacks on Iran and the subsequent closure of the Strait of Hormuz, the RBA increased interest rates in consecutive meetings in February and March.
With higher fuel costs leading to overall price increases, many economists, including Australia’s big four banks, are predicting cash interest rates will rise to 4.35 per cent for a third consecutive month in May.
Mr Hauser said the RBA was unsure whether current rates were high enough to keep inflation under control.
“Interest rates are going to have to go to a level that brings inflation back to target, to be completely honest, if that means they’re going to go higher, that means they’re going to go higher. If it means they’re high enough, it means they’re high enough,” he said at a financial event at New York University.
“I wouldn’t say we have high confidence that we’ve got interest rates right yet because there’s never high confidence. But we’re going to have to watch this new shock pretty carefully.”
Mr. Hauser said companies were telling the central bank that it was incredibly difficult to pass on price increases.
Mr. Hauser said some models show that a visible shock that affects every company’s cost base, such as the Middle East crisis, gives firms the opportunity to weather price increases that would otherwise be difficult to achieve.
“If that’s the case, we’ll have to respond to that, but I don’t know that we’ve seen enough yet to be sure.”
The RBA’s two rate hikes and the Iran war have caused the biggest fall in consumer confidence since the start of the COVID-19 pandemic, according to the Westpac-Melbourne Institute consumer sentiment index.
“Australian consumers are facing a new ‘cost of living’ shock,” said Matthew Hassan, Westpac’s head of Australian macro forecasting.
The index decreased by 12.5 percent to 80.1 points in April; near historic lows but still above the beginning of the pandemic and the recessions of the 1980s and early 1990s.
“A sharp deterioration in expectations suggests consumers are preparing for a return to the prolonged period of weakness seen in the 2022-24 inflation fight,” Mr Hassan said.
Meanwhile, business confidence recorded the second biggest decline on record in March, according to the National Australia Bank’s monthly business survey.
The 29-point decline of the index dragged it into the pessimistic zone. NAB economists Gareth Spence and Michael Hayes said declines of this magnitude had only been seen before during the Global Financial Crisis and the onset of Covid-19.
But business conditions fell by only one percentage point; This “reflects the fact that although global news is influencing sentiment, it is still early in terms of action.”
But forward-looking measures suggest a deterioration in conditions is on the way.
Futures orders fell six points, erasing gains since the beginning of 2026; The increase in purchasing costs increased by three percent on a quarterly basis, double the rate recorded in February.
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