War on Iran ‘making us all poorer’ but RBA may need to hike interest rates again, official warns
A senior Reserve Bank official says soaring fuel prices from the Iran war is “making us all poorer”, but signalled the central bank may need to hike interest rates again to prevent inflation getting out of hand.Chris Kent, an assistant governor at the RBA, said that a hit to financial markets from a global energy shock would normally argue against further rate rises.“A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer.Central banks cannot change that,” Kent said.“But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures.
”Consumer price growth was 3.7% in the year to February, already far above the RBA’s target of 2.5%, after an unexpected jump in price pressures over the back half of last year.This month’s surge in petrol prices has led economists to warn inflation could reach 5% by the middle of this year, and the RBA has become increasingly concerned that rapid price rises will embed a high inflation mindset among Australians that will be hard to shake.The assistant governor’s comments came as the government said it would back an “economically sustainable” above-inflation wage rise for 2.
7 million workers as part of this year’s minimum wage decision,The ACTU this week argued for a 5% increase, while employer groups have warned an increase of more than 3,5-4% would heap more pressure on businesses struggling with high operating costs and add to economy-wide inflationary pressures,Amanda Rishworth, the employment minister, on Thursday hit back against claims that the government’s recommendation to the Fair Work Commission would make it harder to bring inflation back under control,“Wages are not a key driver of the recent pressures that we’ve seen when it comes to inflation,” she said.
Kent in his speech said the fuel-linked inflationary spike could “necessitate a more restrictive stance of policy”, or higher interest rates.“The supply shock also poses a risk to inflation and longer term inflation expectations at a time when there are ongoing capacity pressures in Australia and several other advanced economies,” he said.Many analysts expect the RBA’s monetary policy board will hike its cash rate for the third straight meeting in early May, despite an almost split decision earlier this month.Financial markets see a roughly 65% chance of a hike in May, and fully anticipate another move higher by June, as well as a further hike by September.With average diesel prices passing $3 a litre across almost every capital city this week, Jim Chalmers revealed that he had asked Treasury officials to model the economic impact of “more challenging circumstances” where global oil prices climb above US$120 a barrel for an extended period, compared with just above US$100 now.
“The end of this war can’t come soon enough for the economy,” the treasurer said.Kent in his speech acknowledged that “the longer the conflict persists, the larger the economic impact will be, and the greater the risk of a material repricing of assets”.“We will continue to assess the countervailing forces operating on the economy, including any tightening of financial conditions, or increase in inflation expectations associated with the conflict, so that the board can set monetary policy to achieve low and stable inflation and full employment over the medium term.”
War on Iran ‘making us all poorer’ but RBA may need to hike interest rates again, official warns
A senior Reserve Bank official says soaring fuel prices from the Iran war is “making us all poorer”, but signalled the central bank may need to hike interest rates again to prevent inflation getting out of hand.Chris Kent, an assistant governor at the RBA, said that a hit to financial markets from a global energy shock would normally argue against further rate rises.“A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer. Central banks cannot change that,” Kent said.“But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures
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