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Summary:

• RBA Deputy Governor Andrew Hauser said rising oil prices pose an upside risk to inflation amid uncertainty around the Iran conflict.

• He stressed the policy response will depend on the size and persistence of the price shock.

• Hauser said there will be “genuine debate” within the RBA board over the next policy move.

• Recent data suggests the economy has limited spare capacity, though consumption has been softer.

• Hauser suggested a 5% peak inflation scenario may be overly pessimistic, while reiterating the Bank’s commitment to keeping inflation anchored.

Reserve Bank of Australia Deputy Governor Andrew Hauser signalled that policymakers may face a difficult decision at the next board meeting, warning that rising oil prices and global tensions could complicate the inflation outlook.

Speaking on Tuesday, Hauser said the central bank’s response to recent energy price increases will depend heavily on how persistent the shock proves to be. With geopolitical tensions surrounding Iran adding uncertainty to energy markets, he said it remains too early to determine how lasting the impact on inflation will be.

• “Our response depends on the size and persistence of the price shock,” Hauser said, adding that the situation remains highly fluid.

Despite that uncertainty, he indicated that inflation risks remain tilted to the upside if energy prices continue to climb. Higher oil prices could push inflation forecasts higher, although Hauser suggested that projections of a 5% peak in inflation may prove too pessimistic.

The RBA’s next board meeting could therefore involve significant discussion among policymakers, with Hauser noting there will be “very genuine policy debate” over the appropriate stance of monetary policy.

His remarks also highlighted the broader strength of the domestic economy. Recent data suggests Australia is operating with limited spare capacity, a factor that can sustain inflationary pressures if demand continues to outpace supply. At the same time, he acknowledged that not all economic indicators have been as strong as anticipated, particularly household consumption.

Still, Hauser described the overall economic backdrop as relatively healthy.

• “The Australian economy in many ways is in good shape,” he said.

A key theme of his remarks was the importance of maintaining credibility in the central bank’s commitment to its inflation target. Hauser warned that allowing inflation to remain elevated or expectations to drift higher would risk repeating the damaging experience of the recent inflation surge.

• “If we fail to act decisively enough to prevent inflation staying high or even rising and expectations of inflation disanchor, it will be bad for everyone,” he said, describing high inflation as “toxic” for the economy.

He emphasised that the RBA must ensure policy settings are sufficient to return inflation to target, adding that the public should not doubt the central bank’s commitment to achieving that goal.

While higher oil prices could weigh on household spending, Hauser noted that Australia’s status as a major energy exporter could offset some of the economic impact through stronger demand for energy exports.

He also pointed to recent GDP data showing the economy expanded 2.6% over the past year, well above the RBA’s estimate of roughly 2% sustainable growth, suggesting activity is running above its long-term capacity.