'Not much' RBA can do about short-term inflation woes: Hauser

Reserve Bank of Australia (RBA) deputy governor Andrew Hauser said the central bank is focused on getting inflation back in line over the medium to long term while acknowledging the short-term outlook remains bleak.

Speaking at an event in New York, Hauser said there isn't much the RBA can do about current conditions and the focus must be on the future.

"It's obvious that inflation is going up in the short term, and people are very conscious of that. We can see that in consumer surveys. There's not much monetary policy can do about that, other than prevent it from getting into long-term inflation expectations," Hauser said.

"The big question for us is what it's going to do to activity, and therefore what that's going to do to inflation over the medium term. Those are the numbers we're crunching through at the moment."

Hauser said the ongoing conflict in the Middle East has put Australia's economy in a unique position.

"The energy intensity has some good news and bad news. We are a net energy exporter: that coal, liquid natural gas, is quite a good earner at the moment, but we are almost wholly reliant on imports for oil, and we are the highest user of diesel per capita in the world," he said.

"So, this is a big real income shock for Australia, even if national income and the fiscal coffers may benefit from that net export position."

Hauser added that while the short-term economic effects of the Middle East conflict are doing damage, there is reason to believe things may calm down.

"You don't want inflation expectations in the medium to long term picking up. That, of course, is a central banker's nightmare and we're very alert to that. Long-term inflation expectations have not picked up, if you look at markets. But of course, that's partly endogenous of expectations about policy," Hauser said.

"But we do need to take account of activity. We do need to take account of the possibility that that will close the output gap for ourselves. Of course, the trickiness there is we know it affects demand, but we probably think it affects supply as well. So, our economists are being kept very, very busy trying to work out that trade off."

Meanwhile, HSBC chief economist Paul Bloxham said the Australian economy has suffered two significant negative shocks over a six-week period, the RBA's back-to-back rate hikes and the sharp rise in fuel prices.

"Our expectation has been that these shocks will weaken household disposable incomes enough, that it would push the economy into a contraction," Bloxham said.

Monthly consumer sentiment for April showed a sharp drop to 80.1 - its lowest level since 2023, consistent with COVID-19 era lows.

"Although it is difficult to fully reconcile the very low level of consumer sentiment with other measures of the economy, we see the sharp change lower - down by 12.5% month on month, which is its largest monthly drop since the pandemic - as a clear signal of a sharp weakening in the economy as already arriving," Bloxham said.

Similarly, NAB's business confidence survey also showed a sharp drop (down 29 points), also falling to its lowest level since the pandemic.

"Our reading is that the dual shocks will primarily and initially feed through the economy as a sharp reduction in household disposable incomes - by our estimate a decline of around 1.8% in disposable income - that will weaken consumer spending," Bloxham said.

"We then expect this to feed through to weaker business activity, eventually weakening hiring. We expect that household consumption will fall in Q2 and that this will see GDP fall in that quarter too."

Bloxham said these developments will put the RBA in a tricky spot moving forward.

"We expect the RBA to remain focused on concerns about excessive inflation in the short run. However, once the activity indicators weaken in a substantial enough way that the RBA is convinced that the jobs market will also loosen more quickly, we expect that the RBA will then determine that it can credibly forecast that core inflation will return to its 2.5% target and will not feel the need to tighten further," he said.

"As we have shown recently, a close look at the RBA's reaction function over recent years shows that the central bank has tended to prioritise its 'full employment' mandate over achieving on-target inflation."