High prices will be locked in for at least another six months, the Reserve Bank governor Michele Bullock has warned, telling Australians the war in Iran has made them poorer but that Tuesday’s rate rise could reduce the risks of a follow-up hike in June.
As Treasurer Jim Chalmers prepares to hand down the federal budget next week with a focus on tax reform, spending cuts and productivity, Bullock said the bank’s third consecutive rate rise was “not going to do anything” to ease inflation in the next six months.
On Tuesday, the bank raised the country’s interest rate to 4.35 per cent: the highest level in nearly 18 months. That adds nearly $100 in monthly repayments to a $600,000 mortgage. Since February, the cumulative increase on the same mortgage has been almost $300.
Commonwealth Bank, Westpac, National Australia Bank, ANZ Bank, and Macquarie all said they would pass on the rate rise to home loan customers.
The RBA predicts quarterly inflation will hit 4.8 per cent within weeks as the Iran war’s hit on fuel prices affects the cost of other goods relatively quickly. Economic growth is expected to halve to 1.3 per cent this year while real wages are expected to contract by 1.5 per cent.
“Australians are poorer … because of this oil shock and there is no way out of that,” Bullock said.
Asked about whether the conflict in Iran affected the board’s decision, Bullock said it was “quite possible that we wouldn’t have had to increase interest rates a third time if the shock hadn’t occurred”.
The bank has examined the possible fallout from shorter-term high oil prices and a continued blockade of the Strait of Hormuz. In both cases, economic growth slows further, inflation pushes higher and unemployment increases.
While Bullock said economic conditions could get “very bad” if the supply of imported fuel into Australia fell short of demand, she signalled the bank was now in a position where it had space to consider various options when it comes to potential rate movements at its next meeting.
“We feel we’re now in a position where we’ve got space to be alert to both sides of the risks,” she said, including inflation being too high, but also the potential downside risks to economic growth and employment if the war continues.
Following the decision, Treasurer Jim Chalmers acknowledged the latest rate rise would make it tougher for Australians already paying a hefty price for the war in Iran.
“The duration and severity of the conflict will determine how much more pressure it adds to global inflation and how much it is a hit to growth,” he said. “[The upcoming] budget will be focused on fuel security, addressing inflation, boosting productivity and resilience and managing global economic uncertainty.”
Shadow Treasurer Tim Wilson repeated his key message, saying the Reserve Bank was forced to increase interest rates because Chalmers “keeps pouring debt petrol on the inflation fire”.
Financial markets expect at least one more rate rise this year, with an even chance of a second before Christmas.
Betashares chief economist David Bassanese said two rate rises would likely drive the country into recession.
“My base case is that the three rate hikes already delivered this year should be sufficient to take some of the wind from the economy, stemming the risks of an entrenched higher level of inflation,” he said.
The RBA expects dwelling investment to drop off, falling from 3.8 per cent in the June quarter this year to 1 per cent by the middle of next year, and slipping into reverse by the end of 2027. During the June quarter of 2028, it expects dwelling investment to fall 1.1 per cent.
Business investment is also forecast to slow, while productivity is expected to flatline.
Business Council of Australia chief executive Bran Black said the decision meant Chalmers had to have the “the strongest possible focus on reducing spending and debt” in next week’s budget.
“Households and businesses of all sizes are already feeling the pressure and the government must not add to it,” he said. “Lifting productivity and attracting investment is the only way to genuinely address inflation and build an economy that works for all Australians.”
The bank has modelled the economic fallout from a continuation of the Iran war. This showed if oil stayed well above $US100 a barrel and the Strait of Hormuz remained blocked, the economy would suffer a hit of up to $60 billion over the next two years, with higher inflation and higher unemployment.
Bullock admitted that the economic fallout from the war was largely beyond the bank’s control, saying the inflation hit now being experienced by Australians was effectively unavoidable.
“That’s done and dusted,” she said. “We know that those prices are coming through.”
Eight board members voted to increase the cash rate target and one voted to leave the cash rate target unchanged at 4.10 per cent, a much more definitive decision than the last rate rise when the board was split 5-4.
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Shane Wrightis a senior economics correspondent for The Sydney Morning Herald and The Age.Connect viaXoremail.
Millie Muroiis the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect viaXoremail.
