Australia is likely to take longer than most other countries to recover from the global oil crisis, with households now in line for an inflation peak in June as high as 5.5%.
The dire warning comes after oil prices fell last week off the back of confirmation of a two-week ceasefire between the Iran and the United States.
The price of oil is still significantly more expensive than usual despite prices decreasing last week. Picture: Getty
While the news looked cautiously promising for Aussie households, seven weeks into the war, a barrel of oil is still costing around $US100, or $AUD143.
The cost is significantly more than the $72-$73 global benchmark price prior to March, placing continuing pressure on supply chains, transport, household budgets and everyday costs.
How, when and if tankers can move through the partially open Strait of Hormuz is just the first part of the picture that determines how long it will take for supply to reach Australia, however.
Around 30% of Australia’s refined fuel supply generally passes through the narrow waterway between Iran and Oman.
The strait is now set to be blockaded by the US Navy to prevent Iran benefitting from selling oil.
US president Donald Trump has announced the US' intention to blockade the Strait of Hormuz. Picture: Alex Wong/Getty
AMP head of investment strategy and chief economist Shane Oliver says Australians will be left waiting far longer than other nation’s for price pressures to stabilise while the bottlenecked area is jeopardised.
“It will take time to reopen shuttered energy production in the Gulf (weeks or months for oil, potentially years for some gas plants), to then load this onto ships, for those ships to arrive at importing countries,” he said.
A combination of physical distance from major refineries, geographic isolation and relatively small population puts Australia at the end of the production chain for refined oil products.
“We may take longer to get back to normal than some other countries,” Mr Oliver warned.
Australia is compromised by its globally isolated position. Picture: Getty
With current timings and agreements in mind, Westpac senior economist Justin Smirk said unleaded petrol prices are expected to peak at $2.46 per litre in late May.
Not included is the 26c increase Aussies can expect at the pump once the government’s fuel excise returns to normal.
“This results in a 1.5% Consumer Price Index increase in the March quarter, a 4.2% annual pace with a further 1.9% CPI rise in the June quarter for a 5.4% annual rate,” Mr Smirk confirmed.
Sustained high inflation is concerning news to Australians, with the year’s two rate hikes having reversed most of the benefits of last year’s long-awaited easing.
Australians are now paying an extra $50 to $60 a week for fuel on average, Youi found, adding up to roughly $3000 extra a year.
The Reserve Bank will meet again in three weeks, with markets pricing in a 64% chance of a third consecutive 0.25 percentage point rate hike.
The trimmed mean calculation, which strips out the most volatile price changes to provide a more comprehensive picture of inflation, is largely what the Reserve Bank relies on to make its decision on the cash rate.
“Core inflation estimates have been raised, with the quarterly trimmed mean expected to rise 0.9% in March, 1% in June and September,” Mr Smirk said.
The RBA is widely tipped to hike the cash rate next month. Picture: Getty
Westpac is anticipating the bank will opt to increase the rate in June and in August, in addition to next month.
This would bring the cash rate to the highest level seen since the Global Financial Crisis, compounding pressures on mortgage holders and repayment levels.
Whether or not the nation does see three more rate hikes in quick succession will depend largely on whether the ceasefire holds and what impact it has on negotiation timelines and how this moves through to inflation pressure in Australia.
Assuming a starting rate of 6.01%, a borrower with a $500,000 mortgage would see minimum loan repayments jump close to $1000 with just one more rate rise.
This article first appeared on Mortgage Choice and has been republished with permission.
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