Households can expect significant additional pressures on the cost of living due to war in the Middle East, with Jim Chalmers confirming the government expects inflation to rise beyond 4.5% in Australia.
But the treasurer said he did not expect the economy to fall into recession because of the war sparked by US and Israeli bombings in Iran.
Now at 3.8% and putting pressure on the Reserve Bank to raise interest rates as soon as this week, inflation could peak at “a mid-to-high four points” under the Treasury’s model, Chalmers said.
Speaking on Sky News on Sunday, he was asked about the National Australia Bank’s forecast that inflation could peak above 5% in the next quarter.
“We’ve looked at a couple of scenarios that clarify some realistic assumptions about global oil prices and how that might translate into inflation, and for how long,” he said.
“If today we were to bet on those forecasts, we would have a peak inflation between four and four points, which is not far from some of those private forecasts.”
The exact duration of the conflict would be critical for the affected economy, Chalmers said.
But the recession – two consecutive quarters of negative economic growth – was not something the federal government was “anticipating or expecting.”
“If you look at the scenarios that the Treasury has already run, they expect there to be a hit to growth, but not a hit to growth that would lead to, you know, a contracting economy in the coming quarters,” Chalmers said.
“Again, there are a lot of unknowns, there is a lot of volatility. There is a lot of uncertainty that existed even before the dramatic escalation of hostilities in the Middle East a couple of weeks ago.”
The Reserve Bank board, which aims to bring inflation back within the RBA’s 2% to 2% target, will meet this week to consider the cash rate. Economists at the big four banks predict an increase, followed by another in May, a decision that will have to be made days before the May 12 budget.
Greens leader Larissa Waters called on the RBA not to raise interest rates. “A rate hike will not stop the chaos of this illegal war that is driving inflation,” Waters said.
“People are already fighting rising prices at the petrol pump and in supermarkets. The RBA should not be raising rates when this latest inflationary pressure is a supply-side disaster caused by a futile war that rate increases cannot stop.”
Chalmers said the economic shock would not stop reform priorities for his fifth federal budget, which is expected to include a reduction in the capital gains tax discount. He said the Treasury was “drawing up a range of tax reform options” for cabinet to consider.
Chalmers said Australia had more than sufficient fuel supplies, despite increasing disruptions due to the Iranian regime’s moves to block the Strait of Hormuz.
One Nation MP Barnaby Joyce said Australia should join countries moving to shore up international fuel supplies by sending a Navy ship to the Middle East.
US President Donald Trump has urged countries to send warships to defend the strategic strait following US attacks on Kharg Island, Iran’s largest oil export terminal.
“You have to be part of a global effort,” Joyce told ABC TV. “If you are part of the beneficiaries of his resolution, you have to do something about it.”
Energy Minister Chris Bowen on Friday reduced fuel companies’ minimum stock obligations to about 700 million liters of petrol and 2.2 billion liters of diesel respectively, a move to free up fuel for regional Australia.
Australia had about 36 days of gasoline and 32 days of diesel in reserve on March 3.
