Australian households face the prospect of a Reserve Bank interest rate hike and petrol prices above $۲ a litre over the coming weeks, economists warn, as the escalating Middle East crisis pushes global crude back above $US۱۰۰ a barrel.
Financial markets now see an even chance the RBA board will deliver a fourth cash rate increase at the next meeting on ۱۱ August.
Warwick McKibbin, the director of the ANU’s Centre for Applied Macroeconomic Analysis, said crude oil prices were likely to stay elevated for “at least a year” as the US-Iran war entered a new and more dangerous phase.
The Houthis’ blockade of Saudi Arabian oil through the Red Sea and the Ukrainians’ increasingly successful destruction of Russian energy infrastructure had heaped further pressure on global oil supply, McKibbin said.
“Getting access to supplies looks different now than it did a few months ago. All the reserves have been run down, particularly in the US. It’s quite a serious situation for the world to be in.”
The phasing down of the government’s fuel tax relief to ۱۶ cents a litre and this month’s ۳۷% jump in the international Brent crude benchmark has pushed the cost of unleaded to $۱.۸۰ a litre, up from a recent low of about $۱.۵۰ at the beginning of the month, according to Motormouth.
Johnathan McMenamin, a senior economist at Barrenjoey, said higher global prices and the end of the remaining fuel excise discount after ۲ August meant unleaded would march back above $۲ a litre over coming weeks.
“That is an uncomfortable level for households, but it isn’t something we are too unfamiliar with,” McMenamin said.
Diesel prices are up by about ۵۰ cents in July to about $۲.۲۰ a litre in the major East Coast cities.
Climbing fuel prices will be another blow to the Reserve Bank’s efforts to bring inflation down while managing the damage to the economy from high energy costs.
McMenamin believes the central bank will pull the trigger next month – a view he had even before the latest developments in the Middle East.
“People will start to see fuel prices go up again, and the concern will be that inflation expectations will once again lift among households and businesses,” he said.
“It does matter for how long the oil price is $US۱۰۰ a barrel – if it’s here for only a couple of days and quickly reverses, then that will provide some relief.
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“But, clearly, we’ve all lost confidence in where it [the oil price] will be in six months.”
With the economy already slowing sharply, not all economists are convinced that the RBA needs to hike again.
Sally Auld, NAB’s chief economist, said she had never assumed the sharp drop in oil prices during the ceasefire was sustainable, even without a major escalation in the conflict.
“But we did think it was going to be just one big spike around March and April, before it settled down. Now it looks like it will be more of a grind, or maybe rolling mini-spikes,” Auld said.
Inflation remains too high but is tracking a little below where the RBA had forecast, Auld said, while unemployment was running a little higher. That combination would be enough to keep the RBA on hold while they waited for a slowing economy to take the steam out of price pressures, she said.
Auld warned that not all Australians will be able to cope with higher borrowing costs and climbing fuel costs.
“If you get an intensification of cost of living pressures plus another rate hike, for a certain segment of households that would be a pretty challenging situation and you would start to worry the economic adjustment won’t be so benign.”
