Market volatility from the escalating conflict across Iran and the Middle East risks compounding Australia’s already delicate inflation situation, economists have warned.
The Israel-US coordinated attack on various sites in Iran last week has prompted a fast-moving Iranian retaliation, raising fears the conflict could spread further across the Middle East and southern Europe.
Several implications to Australia’s economy are tied to this, notably the effect on, and response of, global financial markets in the wake of an expected sharp spike in oil prices.
War-induced energy shocks tend to push up fuel prices, flowing through to Australian households at the bowser.
Fuel makes up 3.3% of the goods considered as part of the Consumer Price Index (CPI) calculation, used to measure inflation in Australia and determine the interest rate.
CPI, a representative mix of what Aussies households spend their money on, also includes things like rent, electricity, home building costs, transport, health and food.
CPI brings together everything Aussies typically spend money on. Picture: Darrian Traynor/Getty Images
Economists say there are several potential implications for the Australian economy, including a boost to headline inflation, as the Reserve Bank prepares to make its next cash rate decision later this month.
But RBA governor Michele Bullock has been cautious not to put a timeline on the impact the Middle East war could have on domestic inflation.
Speaking in at the AFR business summit in Sydney on Tuesday, Ms Bullock said it was “too early” to know how the economy will react, though has not ruled out the chance of a rate hike as soon as this month, saying "every meeting is live."
“Events are moving rapidly and there are different ways this can play out,” she said.
“We will take some time to make sense of what it could mean for inflation here. The potential implications for inflation expectations are something we are very alert to."
RBA governor Michele Bullock says the bank is not certain on the path ahead for interest rates. Picture: Martin Ollman
A rate hold would be welcome news for homeowners, with Australians having already felt the pinch of rising inflation since October.
“These events are a timely reminder that in this world of geopolitical uncertainty, things can change quickly,” Ms Bullock said.
As for the next cash rate decision on 17 March, markets are still pricing in a hold scenario. All of the big four banks expect the next rate hike will come in May.
In a note on Tuesday, CBA's head of Australian economics Belinda Allen said she expects the RBA will look beyond the temporary inflation boost.
"We expect the RBA to look through any supply side shock to petrol and headline CPI in the near term, Ms Allen said.
“If the current conflict were to materially alter the global outlook, that assessment could change.
“At this early stage, and with inflation already too high in Australia, we expect it would take a significant deterioration and a shift to a demand shock for the global and local economy for the RBA to not lift the cash rate as we expect in May.”
Ms Allen noted there will be other economic impacts beyond higher fuel prices and inflation, for instance, tourism and shipping delays.
"If the conflicts were to evolve from an energy supply shock to a demand shock, the implications for Australia would be more significant," she said.
Commonwealth Bank, Westpac, ANZ and NAB all expect a rate hike in May. Picture: News Corp Australia
"That said, we have seen the Australian economy show remarkable resilience to big global events in recent years, with the currency providing an important buffer."
Ms Bullock was tight lipped on the board’s expected movement in both March and May this week, saying the its approach to dealing with uncertainty “varies depending on the context”.
“These types of uncertainties are complex because there are many ways that events could unfold and so they can’t be easily captured in our models,” she said.
“As much as I know the public would like more certainty about the direction of interest rates, it would be wrong for us to pretend to have greater certainty than we do.”
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