Homeowners warned interest rate hikes just days away after sudden shock: ‘Bad for everyone’
RBA deputy governor Andrew Hauser has warned the jump in the oil price and the fallout from the Middle East conflict will push inflation above its forecasts. (Source: AAP)
Economists have started pulling forward interest rate hike expectations for Australia, with some now tipping the Reserve Bank of Australia will raise rates at its March meeting early next week. The war in the Middle East has sent oil prices surging, and Aussies have been warned it will push inflation higher.
RBA deputy governor Andrew Hauser admitted that surging oil prices and general supply chain fallout from the Iran war will likely push inflation much higher than previously forecast. Last month, the central bank had forecast inflation to peak at 4.2 per cent by June.
Even before the US-driven conflict began, inflation was already running hot in Australia, with headline inflation at 3.8 per cent in January – well above the RBA’s 2 to 3 per cent target range.
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While Hauser didn’t put a number on the likely mid-year level, he downplayed the prospect of it reaching as high as 5 per cent as NAB’s chief economist Sally Auld has suggested this week.
“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,” he said on a podcast with political veteran Michelle Grattan last night.
Hauser said recent data confirmed the economy currently had “limited spare capacity”, with the GDP growth coming in at 2.6 per cent on the year earlier, which was its fastest rate of growth in nearly three years.
Of next week’s monetary policy meeting, the deputy governor said he expects there will be “very genuine debate” about hiking again.
Hauser said if the RBA failed to act decisively to stop inflation from staying high or even rising, and keep a lid on inflation expectations, it would be “bad for everyone” in the economy.
The RBA monetary policy board will meet next week and some economics are now tipping a hike. (Source: AAP)
“So failing to raise rates to the level they need to be and allowing inflation to get out of control is a clear problem,” he said.
However, Hauser said there were risks on the other side as well, which the RBA was always balancing.
“If you act precipitously, if you compound uncertainty, if you drive the economy to slow down too rapidly, then you are going to push inflation down and you are going to harm people as unemployment picks up,” he said.
The odds of an RBA rate hike next week have surged to 67.5 per cent on Wednesday morning following Hauser’s comments.
Major banks NAB and Westpac now expect hikes in both March and May, which swiftly return the cash rate back up to 4.35 per cent.
“The starting point of robust growth, a too-tight labour market and too-high inflation already supported further tightening,” NAB’s economists Sally Auld, Gareth Spence and Taylor Nugent wrote.
“New upside pressure on inflation tips the balance in favour of an additional increase.”
The economists pointed to the “hawkish” commentary coming out of the RBA, which indicated the Iranian conflict would be an “inflationary shock” for the country.
Westpac chief economist Luci Ellis said the effect of higher oil prices on headline inflation was “large but temporary”.
“The RBA Monetary Policy Board will nevertheless feel compelled to react, especially given the hit to confidence and financial markets has so far not been severe,” she said.
NAB noted its forecast would depend on the trajectory of oil prices and the domestic data flow, and it continues to expect a gradual easing back from the second half of 2027.
Westpac said a single hike in March was “still possible”, but it was not their base case.
Some economics expect the RBA to increase the cash rate by 0.25 to 4.10 per cent next week. (Source: AAP)
Bank of America was the first of the major forecasters to yesterday predict the RBA would hike interest rates to 4.1 per cent in March, “contrary” to consensus and previous market pricing.
Nick Stenner, head of Australian and New Zealand economics at the investment bank, said the Iran war-driven oil shock introduced a “material” upside inflation risk.
“Given above-target inflation and a tight labour market, we see no compelling reason to delay the inevitable,” Stenner said.
Capital Economics and UBS have also reversed their forecasts and are expecting a March interest rate hike.
Capital Economics said the conditions for a sustained acceleration in inflation were already in place before the Iran war, with the recent spike in oil prices adding further risk.
It said stronger-than-expected economic growth, a tight labour market and persistent price pressures had strengthened the case for a further hike.
“In our view, the flow of data in recent weeks, combined with the fallout from the Iran conflict, raise the risk that the RBA will fall further behind the curve on inflation,” Senior economist Abhijit Surya said.
It expects the RBA to hike in March, followed by another hike in May, to take the cash rate to a peak of 4.35 per cent.
UBS economist George Tharenou also pointed to stronger-than-expected GDP growth, low unemployment and robust inflation that “warrant further (and earlier) increases in the cash rate”.
