Millions of Australians could be hit by the double whammy of rising petrol prices and higher mortgage payments amid growing expectations that the US-Israel war against Iran will force the Reserve Bank to raise rates on Tuesday.
Economists at three investment banks have shifted gears and now predict the RBA board will raise the cash rate to 4.1% at the conclusion of its next two-day meeting, after central bank deputy governor Andrew Hauser said the data had “confirmed even more decisively… that our economy currently has limited spare capacity.”
Hauser, speaking to Conversation’s Michelle Grattan, said: “Further price increases from Iran, if that’s what we end up seeing – and that’s a big if – is not a useful development from the perspective of our policy discussion.”
Bets on a March rate hike increased following Hauser’s comments, with financial markets now pricing in a 64% chance of consecutive rate hikes after the February move.
George Tharenou, chief economist at UBS, said the market had been surprised by Hauser’s “hawkish” comments and that it appeared central bank economists would recommend a rate increase to the board.
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“But we expect this recommendation to be fully debated by the RBA board and therefore do not expect a unanimous vote to increase it,” he said.
Gasoline prices in Sydney and Brisbane averaged $2.18 per liter on Tuesday, $2.16 per liter in Melbourne, $2.12 per liter in Canberra and $1.94 per liter in Perth, according to Motormouth.
This has pushed average weekly gas bills to an all-time high of more than $73.15 and an increase of almost 25% on the February average, according to AMP analysis, assuming a typical household consumes 35 liters a week at $2.09.
Reflecting the potential rise of higher interest rates, the Australian dollar rose to 71 cents, defying the turmoil in global financial markets that would normally trigger selling in the Australian dollar.
There have been wild gyrations in energy markets as traders react to often contradictory statements from Donald Trump about when the new war in the Middle East will end.
The international benchmark price for Brent crude rose to almost $120 this week before collapsing and now stands at $87.80, according to Bloomberg, up 40% from the beginning of the year.
In his interview, Hauser said the central bank was updating its inflation forecasts in response to the impact of higher energy costs, “but it is clearly true that there is an upside risk to that projection in February.”
Now that financial markets are pricing in the possibility of a third rate hike for November, the lieutenant governor said inflation of 3.8% was already “well above our target range” of 2% to 3%.
But he said the board would also consider the possibility of higher energy costs affecting the global economy, which would be an argument against a rate increase next week.
“I think there will be a very genuine debate,” Hauser said.
“Inflation is too high. Higher prices don’t help that debate. But there are arguments on both sides and I think if there was ever a time for board members to earn their meager salaries, it will be this month.”
