The jump in global oil prices after escalating military strikes by the US and Israel on Iran have driven oil above 100 dollars a barrel and spiked prices at the pump for Aussies. Picture: George Chan/Getty Images.
Aussies are bracing for impact, with three of Australia’s biggest banks now predicting three interest rate hikes in a row, as petrol prices surge and inflation nudges 5 per cent.
The Commonwealth Bank has joined National Australia Bank and Westpac in revising their interest rate forecasts, tipping RBA will hike by 0.25 percentage points on Tuesday, followed by another increase at its next meeting in May – making it three rate hikes in a row.
CBA head of Australian economics Belinda Allen said recent commentary from the RBA has confirmed their hawkish stance and focus on inflation.
“Inflation is already too high, the economy is already breaching its capacity limit and the labour market is tight,” she said in a statement Wednesday afternoon.
“We now expect the RBA to hike in March and May, taking the cash rate back to 4.35 per cent.”
Canstar data insights director Sally Tindall said a hike next week would increase repayments for a $600,000 mortgage with 25 years remaining by $91 a month, which would mean a rise of $181 across February and March – let alone what May would bring.
“Borrowers hoping the worst of the rate hikes are behind them might need to brace themselves,” Ms Tindall said.
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NAB chief economist Dr Sally Auld predicted headline inflation could hit 5 per cent for Q2. Picture: Lisa Maree Williams/Getty Images.
The RBA monetary policy board will meet on Monday and Tuesday next week – their first gathering since war broke out in the Middle East impacting fuel supply chains globally, a move that’s seen warnings prices could spike to as high as $3 a litre for petrol.
Prices are today already as high as $2.20 a litre for E10 in Brisbane, Melbourne, Sydney and Adelaide, with diesel touching $2.50/litre and unleaded 98 hitting $2.71/litre in Perth, according to PetrolSpy monitoring.
RBA deputy governor Andrew Hauser said “I think if ever there was a time when Board members will earn their meagre salary, it will be this month”- describing high inflation as “toxic”.
This as National Australia Bank chief economist Dr Sally Auld said the market had already begun pricing in more rate hikes this year.
“Market pricing has moved such that the AUD front-end is now priced for a further 63bp of rate hikes over the course of this year (a terminal cash rate just shy of 4.5 per cent). 3Y AUS government bond yields are at their highest level in almost 15 years,” she said in her latest economic comment.
She warned rising global oil prices would make it harder for the RBA to bring inflation under control – predicting that could peak at 5 per cent this quarter – and increase the risk interest rates would stay higher for longer.
“At the end of last week, we outlined how we thought inflation and growth outcomes would respond to developments in the oil price. Since then, oil has moved higher. The March surge in fuel prices looks likely to tip Q1 trimmed mean to a 0.9 per cent qoq outcome.”
“The peak in inflation remains highly sensitive to energy price movements, but we now think headline inflation could peak around 5 per cent yoy in Q2.”
Market pricing for central bank interest rates. Source: Commonwealth Bank Global Research
Commonwealth Bank research said after hawkish comments by Mr Hauser “financial market pricing for RBA interest rate hikes moved substantially”.
“The market is now pricing over a 60 per cent chance of a hike later this month, compared to around a 30 per cent chance before Hauser spoke.”
Headline inflation was last at the 5 per cent level at the tail end of the pandemic in the September quarter 2023 when it was 5.3 per cent – which, at the time, was a sharp improvement on the four quarters before it when it hit as high as 7.9 per cent.
Pressed on the headline inflation prediction, Mr Hauser said “that 5 per cent, I think, assumes that the oil price is in the sort of $100 range, which we were well into (Monday), but not into (Tuesday). We don’t have updated numbers on our forecasts now. We don’t actually formally update our forecasts until May, which is the meeting after the one coming up. But it clearly is the case that it’s an upside risk to that projection in February.”
Mr Hauser said in an interview with The Conversation’s Politics with Michelle Grattan Podcast that the RBA had “a whole army of our economists at the moment working through that”.
“I don’t want to give a number that might give a false sense of accuracy, but certainly directionally it’s higher than the projection we published in February.”
Mr Hauser said “it’s fair to say further increases of prices from Iran – if that is what we end up seeing, and that is a big if – is not a helpful development from the perspective of our policy discussion”.
“Inflation is too high. Higher prices don’t help that debate. But there are arguments on both sides.”
The market on Wednesday morning: Source: ANZ Research
ANZ Bank, which remains the only one of the big four to not pick a hike on Tuesday, instead changed its RBA call to a 25bp hike in May.
“Following the May meeting, we expect the cash rate to stay on hold at 4.1 per cent for an extended period,” the bank said in its Australian monthly wrap.
“The Middle East conflict adds uncertainty to the economic outlook. Primarily, the recent increase in oil prices could cause a lift in inflation. However, a longer term disruption in energy supply could flow through to softer activity, which could reduce inflation. The uncertainty around these impacts creates a difficult reaction function for the RBA, though recent commentary from the RBA has skewed towards alertness to higher inflation.”
ANZ Research’s morning update said the crude oil situation is changing daily, and “the path to ending the conflict remains unclear”.
“Israel’s Prime Minister Netanyahu indicated he’ll keep pressing until the regime is overthrown. However, Trump offered his strongest signal he’s prepared to de-escalate, saying his military objectives are pretty well completed. Meanwhile, attacks on energy infrastructure continue.”
“The UAE stopped operating the Ruwais refinery, one of the world’s largest, after a nearby drone attack. Gulf countries have also deepened their output cuts to as much as 6.7mb/d, equivalent to around 6 per cent of global supply.”
“This now represents one of the biggest hits to global supplies from major geopolitical events over the past 55 years.”
Consumer Inflation expectations. Source: NAB
The importance of those developments can’t be understated, with Dr Auld warning “energy prices feed into almost every part of the economy”.
“When oil and gas prices rise quickly, it pushes up costs right across the supply chain,” she said. “With inflation already above target, new cost pressures are a challenge for the RBA”.
But there is one factor that could stay the RBA’s hand when it comes to rates – the fallout on the economy and jobs.
“The nature of a supply side shock to oil means that it will place upward pressure on inflation and if sustained, it will lower GDP growth too,” Dr Auld said. “This is an uncomfortable set of outcomes for any central bank, as it sees movement away from both inflation and full employment mandates. In this instance, minimal change in the appropriate stance of policy is probably a good starting point from which to assess the case for further action.”
“Were the RBA to hike next week, a cash rate of 4.1 per cent would take the broader policy stance (in a nominal context) to a modestly restrictive setting. It is likely too early for the Monetary Policy Board to know with any confidence whether that would be an appropriate outcome”.
Fuel inflation fallout across the Australian is the wildcard that could impact the cost of mortgages if the RBA is forced to hike the cash rate target.
Ms Tindall said “Australia’s robust economy and jobs market, coupled with core inflation that is moving in the wrong direction, and likely to continue to do so, paint a strong case for a March hike.”
“However, the split among the big four forecasts highlights just how uncertain the outlook currently is. The RBA is walking a tightrope between tackling persistent inflation and avoiding pushing too hard. A cash rate hike next week is not a done deal.”
The RBA monetary policy board will deliver its cash rate decision at 2.30pm ADST on Tuesday.
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