Australian households warned interest rates could lift another two times this year as Iran war worsens inflation woes

Price-squeezed Australians already battling high inflation and rising interest rates have been delivered a grim warning that their cost of living woes will worsen.

Inflation has lingered at 3.8 per cent while the Reserve Bank of Australia was forced to lift the cash rate to 3.85 per cent in February to temper the price rises.

CPI could worsen as fresh GDP figures showed productivity is flat while the economy grows, heaping pressure on prices.

In another blow to households, the nation’s three-year bond rate has signalled that the RBA will deliver two more interest rate hikes this year.

The three-year bond rate is often used to predict where the RBA will set the cash rate.

War in the Middle East and the inflationary impact this has on oil prices caused the bond rate to lift to 4.43 per cent – higher than where the RBA held the cash rate throughout 2024.

This marks the highest three-year bond rate level since November 2023, when the RBA bumped the cash rate to 4.35 per cent.

It has lifted 0.19 per cent since Monday as leading economists and analysts flag concerns about inflation.

The jump is the largest weekly increase since October last year when inflation was picking up in the back half of last year.

For an Australian household with a $600,000 mortgage, a 0.25 per cent rate hike will add $90 to their monthly repayments, according to Canstar.

Money markets say there is a 33 per cent chance the RBA will hike rates on March 17 but are betting the central bank will lift rates at least once by May.

Inflation concerns have been heightened by the oil price surge after Iran blocked the Strait of Hormuz, where 20 per cent of the world’s oil is transported through.

AMP chief economist Shane Oliver predicted Australians could pay an extra 40c per litre at the bowser if oil lifted another US$15 to US$100 per barrel.

This would also add 0.8 percentage points to inflation and have a dampening impact on growth, Mr Oliver said.

“This is because it would add around $14 a week to the household petrol bill leading to a cut back in spending elsewhere in the economy. In other words, it will act as a tax on households,” he said.

Inflation concerns were also amplified by Australia’s growth jumping beyond market expectations, with Deloitte Access Economics’ Stephen Smith arguing the higher economic growth was actually “bad news”.

“While stronger growth may seem like positive news, it will be a concern for the Reserve Bank. The RBA is already of the view that the economy is operating above its potential,” Mr Smith said.

“It will also be alarmed by the revelation that there was no labour productivity growth recorded in the quarter. Unless this changes, low growth and high inflation could become entrenched as long-term features of the Australian economy.

“Combined with elevated inflation, today’s data will keep the RBA on high alert and increase the likelihood of a rate hike in May.”