The speed and degree of monetary tightening means businesses and households are now at risk “because that really has an impact on cost of living, taking money out of their pocket, and not everybody can adjust so quickly, and those that can’t typically fall over”, Mr Elliott said.
National Australia Bank business head Andrew Irvine separately warned that businesses are running up against the limits of their ability to pass through cost inflation because households are becoming more wary around spending.
Mr Elliott warned that this time around, funding market challenges will drive the cost of capital higher, leading to less credit being available in the economy as banks focus more on liquidity and the market emphasises capital adequacy.
“The first thing we’re going to do is protect the bank, our balance sheet, make sure we can continue to operate, liquidity, capital, protect our people, look after our customers,” Mr Elliott said.
“We have to adapt to this new world of capital markets.”
Above-target inflation means central banks are proceeding with their tightening cycles in the face of the ongoing banking crisis, which started with the collapse of Silicon Valley Bank.
Standard Chartered chief executive Bill Winters told Bloomberg TV on Friday that there was a risk over the longer-term that central banks stymie growth in the real economy by depriving the market of capital in their bid to tame inflation.
“I suspect that it will all be replaced by banks and capital markets, but we’ll see,” Mr Winters said.
Mr Elliott warned the current turmoil would almost certainly result in stricter bank regulation.
“I can almost guarantee regulators around the world are thinking of new things they need to put in place to protect depositors and the economy from change going forward. And so there will be a whole bunch of things that we need to prepare for,” Mr Elliott said.
The inflation challenge is likely to weigh on the ability of central banks to deliver the same relief financial markets and households have grown accustomed to.
“There’s always a casualty in these events. Of course, the regulator and governments are trying to sort of limit the blast radius, if you will. They’re not intentionally trying to cause harm, but it’s inevitable, and they try to do the best to limit the damage so that lots of people have a small amount of pain, as opposed to a small number of people having lots,” Mr Elliott said.
The Reserve Bank meets next on April 4. Last week, the Bank of England joined the US Federal Reserve, and the European Central Bank one week before, in raising interest rates.
Judo Bank chief economist Warren Hogan said: “There are good arguments to pause in April, particularly if recent global financial instability does not settle down.”
But he added there is also a view that the RBA would be more comfortable moving the cash rate closer to 4 per cent before assessing a pause. The cash rate is 3.6 per cent.
“There is no point pausing for a month before hiking again. The RBA Board need to get the cash rate to a level that they think will buy them the time to observe how the economy unfolds for at least three months, if not longer,” Mr Hogan said.