Stagflation, low innovation, fragmentation: RBA weighs in on supply shocks

With the unemployment rate rising to 4.3 per cent in February from 4.1 per cent the month before, RBA deputy governor emphasised the risks the economy is facing, amid economists' predictions that the nation will face six months of further inflation due to energy shocks caused by the Middle East crisis.

Speaking at the Institute of International Finance Global Outlook Forum in Washington D.C. on Thursday (16 April), RBA deputy governor Andrew Hauser (pictured) said that adverse supply shocks (COVID-19, Ukraine, Iran and AI), which push inflation up and activity down, are a central banker’s nightmare.

This is in the face of the Treasurer’s recent statements about the global economy, warning that we are in a ”very serious and dangerous time”, after the International Monetary Fund’s predictions that a prolonged conflict in the Middle East could lead to a global recession, as reported by Accounting Times.

At the forum, Hauser put the solution for dealing with these shocks into three broad “buckets”. Analysing the shocks, assessing their impacts over the medium-term, exploring the flexibility in the inflation targeting regime and emphasising the importance of stable inflation to the public.

“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 ... so you need to be clear and direct with people,” Hauser said.

“We have to be clear that what monetary policy can do is anchor inflation and inflation expectations. It can’t deal with the distributional goals, it can’t make you richer, or not richer, [and] it can’t replace lost supply.”

“People are maybe thinking that monetary policy can solve everything, and [that] you need rock solid support from governments at a time when you’re going to be making hard decisions. That’s actually quite a tough list in terms of setting monetary policy and lists that we haven’t always met in the last period.”

Further, Hauser told the forum that lower productivity growth and the lack of innovation remained dominant policy challenges for the Australian economy, and emphasised the need for new ways to generate innovation in economies.

Increasingly separate pools of capital that are hard to allocate across different countries, separate payment systems, walled gardens, regulatory competition and divergence are causing fragmentation – a substantial financial stability risk.

He said this fragmentation was likely to lead to sanctions and cross-border contagion, as well as provision and liquidity resolution.

Sister brand The Adviser recently reported on at a fireside chat with the Money Marketeers of New York University on Tuesday (14 April), where Hauser said he did not have strong “confidence” that the current policy setting was where it needed to be, with the central bank setting the March cash rate at 4.10 per cent.