SYDNEY: Australia’s central bank says it’s impossible to confidently predict the path for policy after raising interest rates for a second time this year as a surge in oil prices from the Middle East war fans inflation risks.
The Reserve Bank of Australia (RBA) saw a risk that inflation would overshoot its target range for a “prolonged period,” minutes of its March 16 and 17 meeting showed, after it raised the cash rate to 4.1%.
Board members discussed the case to leave policy unchanged but decided that the arguments for a hike were “stronger,” according to the record of the meeting released in Sydney yesterday.
RBA board members said that “it was not possible to predict the future path for the cash rate target with any confidence, given the high degree of uncertainty around the breadth and duration of the current conflict in the Middle East.”
The minutes showed that all members had agreed that a further tightening in monetary policy was needed, though a minority of four believed a hike could wait until there was more evidence that demand continued to exceed supply.
“The rise in oil prices had further increased the risk that inflation would remain above target for a prolonged period,” the minutes showed.
Staff members shared a simple estimate with board members that the direct effect via petrol prices of oil remaining around US$100 a barrel would on its own lift headline inflation in Australia to around 5% in the June quarter from a year ago.
That’s three quarters of a percentage point higher than its February forecast and well above the midpoint of the RBA’s 2% to 3% target range.
“The case to increase the cash rate target at the current meeting was founded on a view that the risk that inflation may not return to target within a reasonable timeframe had increased enough to warrant an immediate response,” the minutes showed.
While the RBA’s March meeting took place after the US-Israeli war on Iran had begun, the conflict has since broadened, with Tehran’s proxies launching attacks on American allies and little sign from either side of de-escalation.
The conflict has prompted the closure of the Strait of Hormuz that connects the Persian Gulf to global energy markets and damaged oil and gas facilities across the region.
The supply shock is driving up petrol prices worldwide and compounding Australia’s existing outbreak of inflation.
Fuel prices in the country have surged to record highs, prompting the government to announce a cut to a tax on fuel to help ease inflationary pressures. Despite the measures, financial markets reckon three more RBA hikes remain possible, taking the cash rate to 4.85%, the highest since late 2008.
On Monday, economists at Westpac Banking Corp revised their RBA rate outlook to now predict three more rate increases.
“A longer conflict would have a material bearing on both inflation and economic activity,” it added.
While the policy outlook remains muddied, the minutes also contained a warning: “if medium and long-term inflation expectations increased, it would ultimately require significantly more contractionary monetary policy to achieve the board’s objectives.”
Last week, assistant governor Chris Kent warned the global energy shock driven by the war in Iran risks further fuelling price pressures in Australia.
Asked if the RBA is willing to force a recession in the economy to slow inflation, Kent had said “that’s not the intention” of the board, adding that it wants to keep shielding the labour market “so long as inflation is on a credible path down”.
Australian policymakers are still trying to gauge whether current settings are right for an economy experiencing a renewed spurt in prices amid a still-tight labour market and poor productivity growth.
They’ve adopted a cautious approach as they navigate the economy to a soft landing, with unemployment historically low at just above 4%.
In a bid to improve transparency and communications around its decisions, the RBA’s monetary policy board members will begin delivering public speeches this year.
Academic Ian Harper, who already gives media interviews in a personal capacity, and business leader Carolyn Hewson will deliver their first speeches in the coming months, an RBA spokesperson said on Monday.
The outlook remains fluid ahead of the May 5 decision. The RBA will receive first-quarter inflation data in late April, alongside updated staff forecasts, both key inputs for policymakers.
Labour market data due in mid-April and consumer spending indicators will also be closely watched.
Global developments, particularly oil price moves linked to the US-Israeli war in Iran, will be central, shaping whether officials judge domestic demand pressures strong enough to warrant further tightening or opt for a more cautious approach. — Bloomberg
