Aussies fight for price hikes as war fuels inflation

Aussies are bracing for the impact, with Australia’s three biggest banks now predicting three interest rate hikes in a row, as fuel prices rise and inflation falls to 5 per cent.

The Commonwealth Bank has joined National Australia Bank and Westpac in revising their interest rate forecasts, saying the RBA will hike by 0.25 per cent on Tuesday, followed by another hike at its next meeting in May – making it three rate hikes in a row.

CBA’s head of economics in Australia Belinda Allen said the RBA’s latest comments have confirmed their hawkish stance and focus on deflation.

“Inflation is already very high, the economy is already overstretched and the labor market is tight,” he said in a statement on Wednesday afternoon.

“We now expect the RBA to hike in March and May, bringing rates back to 4.35 percent.”

Canstar’s director of data, Sally Tindall, said next week’s increase would increase repayments on a $600,000 25-year mortgage by $91 a month, which would mean an increase of $181 in February and March – not to mention May.

“Borrowers hoping the worst of the rate hike is behind them may need to brace themselves,” Ms Tindall said.

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NAB chief economist Dr Sally Auld predicted that inflation could reach 5 percent in Q2. Photo: Lisa Maree Williams/Getty Images.

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The RBA’s monetary policy board will meet on Monday and Tuesday next week – their first meeting since the outbreak of war in the Middle East that has affected petrol stations around the world, a move seen as a warning that prices could rise to $3 a liter of petrol.

Prices today are already as high as $2.20 a liter for E10 in Brisbane, Melbourne, Sydney and Adelaide, while diesel touches $2.50/litre and unleaded 98 hits $2.71/litre in Perth, according to PetrolSpy monitoring.

RBA Deputy Governor Andrew Hauser said “I think if ever there was a time when Board members would get their minimum wage, it would be this month” – describing inflation as “toxic”.

This is as National Australia Bank chief economist Dr Sally Auld said the market has already started to raise prices this year.

“Market prices have moved in such a way that the AUD front-end is now pricing in an additional 63bp of rate hikes during the year (a lethal rate of less than 4.5 per cent). The 3Y AUS government bond yield is at its highest level in nearly 15 years,” he said in his latest economic commentary.

He warned rising global oil prices would make it harder for the RBA to keep inflation under control – predicting it could rise by 5 per cent this quarter – and raise the risk interest rates would remain high for longer.

“At the end of last week, we revealed how we think inflation and growth outcomes will respond to oil price developments. Since then, oil has moved higher. The increase in fuel prices in March looks set to reduce Q1 to a 0.9 percent cumulative effect.”

“Headline inflation is always very sensitive to energy price movements, but we now think inflation may rise by around 5 percent in Q2.”

Market prices of central bank interest rates. Source: Commonwealth Bank Global Research

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Commonwealth Bank research said that after Mr Hauser’s comments “financial market pricing for an RBA interest rate hike has gone too far”.

“The market is now pricing in more than a 60 percent chance of a rise later this month, compared to a 30 percent chance before Hauser spoke.”

Inflation ended at 5 percent at the end of the pandemic in the September 2023 quarter when it was 5.3 percent – at the time, which was a big improvement on the four quarters before it when it peaked at 7.9 percent.

Pressed on the subject of inflation forecasts, Mr. Hauser said “that 5 percent, I think, think the price of oil is kind of $100, which we went into (Monday), but not (Tuesday). In that picture in February.”

Mr Hauser said in an interview with The Conversation’s Politics and Michelle Grattan Podcast that the RBA “has a whole army of our economists currently working on that”.

“I don’t want to give a number that might give a false sense of accuracy, but it’s certainly much higher than the design we published in February.”

Mr Hauser said “it’s fair to say further escalation in Iran – if we end up seeing that, and that’s a big if – is not a useful development from the point of view of our policy discussion”.

“Inflation is too high. High prices don’t help that argument. But there are arguments on both sides.”

Wednesday morning market: Source: ANZ Research

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ANZ Bank, which was the only one of the big four not to hike on Tuesday, instead changed its RBA call to 25bp for May.

“Following the May meeting, we expect the rate to remain at 4.1% for an extended period,” the bank said in its monthly Australian wrap.

“The conflict in the Middle East adds uncertainty to the economic outlook. In particular, the recent increase in oil prices may cause inflation. However, long-term disruptions in energy supply may spill over into soft activities, which could reduce inflation. Uncertainty about these effects creates a difficult response task for the RBA, although recent comments from the RBA have been to the upside.”

ANZ Research’s morning update said the crude oil situation is changing daily, and “the path to ending the conflict remains unclear”.

“Israeli Prime Minister Netanyahu has indicated that he will continue to suppress until the regime is overthrown. However, Trump has indicated that he is willing to back down, saying that his war goals have been well achieved. Meanwhile, the attack on the energy infrastructure continues.”

“The UAE stopped using the Ruwais refinery, one of the world’s largest, after a drone attack nearby. Gulf countries also deepened their cuts to 6.7mb/d, equivalent to around 6 percent of the global supply.”

“This has now to be the biggest advance in global assets from major geopolitical events in the last 55 years.”

Consumer Inflation Expectations. Source: NAB

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The importance of such developments cannot be understated, as Dr Auld warns that “electricity prices permeate almost every part of the economy”.

“When oil and gas prices rise rapidly, they increase costs throughout the supply chain,” he said. “With inflation already above target, new cost pressures are a challenge for the RBA”.

But there is one thing that could hold the RBA’s hand when it comes to rates – the collapse of the economy and jobs.

“The nature of the oil supply-side shock means that it will put upward pressure on inflation and, if it continues, will reduce GDP growth,” said Dr Auld. “This is a negative set of results for any central bank, as it sees a move away from both inflation and full employment mandates. In this case, a small change in the appropriate policy stance is probably a good starting point to assess the issue for further action.”

“If the RBA were to hike next week, a rate of 4.1 per cent would take a very broad (normal) policy stance to a more moderate stance. It’s probably too early for the Monetary Policy Board to know for sure whether that would be the right outcome”.

Fuel inflation across Australia is a wild card that could impact borrowing costs if the RBA is forced to raise interest rates.

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Ms Tindall said “Australia’s strong economy and labor market, coupled with inflation moving in the wrong direction, and likely to continue to do so, paint a strong case for a hike in March.”

“However, the divergence between the four major forecasts highlights how uncertain the mood is right now. The RBA is walking a tightrope between tackling persistent inflation and avoiding too much pressure. A rate hike next week is not a done deal.”

The RBA’s monetary policy board will deliver its monetary policy decision at 2.30pm ADST on Tuesday.