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The RBA is facing a “central banker’s nightmare” as rising oil prices push inflation higher while threatening economic activity. Speaking in New York, Deputy Governor Andrew Hauser warned that the Middle East conflict is delivering a significant income shock to Australia, complicating the policy outlook at a time when inflation is already “too high.”

Hauser highlighted the growing tension between price pressures and growth risks. “It is the central bankers nightmare, you know, inflation up, activity down,” he said. While recent consumer sentiment surveys have plunged, he cautioned that they may not fully capture the extent of the hit to consumption. “If they are right, we have a big income shock coming our way,” he added, pointing to the impact of higher fuel costs on household spending.

At the same time, Hauser acknowledged the high degree of policy uncertainty. “I wouldn’t say we have high confidence that we’ve set interest rates at the right level,” he said, emphasizing the need to closely monitor how the shock feeds through to the economy. With inflation pressures clearly skewed to the upside and energy costs yet to fully pass through, the RBA is likely to remain focused on medium-term inflation risks, even as growth headwinds intensify.

Australian business confidence has collapsed at a pace only seen during the GFC and COVID, highlighting the immediate impact of Middle East tensions on sentiment. NAB Business Confidence plunged from 0 to -29 in March, marking the second-largest monthly decline in the survey’s history. As NAB’s Gareth Spence noted, declines of this magnitude have “previously only been seen in the GFC and the onset of COVID,” underscoring the severity of the shock.

However, the breakdown in confidence has not yet translated into a sharp deterioration in activity. Business Conditions were little changed at 6, suggesting the economy is still carrying underlying momentum. Spence emphasized that “while the global news backdrop has impacted sentiment, it is still early days in terms of the flow through to activity,” pointing to a lag between sentiment and real economic performance.

At the same time, inflation pressures are already building. NAB reported that purchase cost growth more than doubled to 3% on a quarterly basis, while product price growth rose to 1.1%. Spence noted the impact on costs and prices has been “immediately obvious,” reinforcing the view that the shock is feeding directly into the inflation pipeline.

Full Australia NAB Business Confidence release here.

Australian consumer sentiment has collapsed back to crisis-era levels as fuel prices and rising interest rates bite. but the RBA is still expected to press ahead with rate hikes as inflation remains the dominant concern.

Westpac Consumer Sentiment plunged -12.5% mom from 91.5 to 80.1 in April, marking the biggest monthly decline since the onset of the COVID pandemic. The index is now hovering near historical lows, underscoring the sharp deterioration in confidence.

The details point to a broad-based weakening in outlook. Near-term expectations have dropped back to levels last seen during the 2022–23 cost-of-living crisis. Job loss fears surged to a 5½-year high, or a 10-year high excluding the pandemic period. According to Westpac, the combination of spiking fuel prices and higher borrowing costs is weighing heavily on real incomes, suggesting another phase of declining per capita consumption.

Yet, weaker sentiment is unlikely to alter the monetary policy path. Inflation remains above target, and the full impact of higher energy costs has yet to be reflected in the data. Westpac expects the RBA to deliver a 25bps rate hike in May, followed by further tightening in the second half of the year, reinforcing the tension between slowing growth and persistent inflation pressures.

Full Australia Westpac Consumer Sentiment release here.