The war on Iran has added to the stress on Australian mortgage holders who now face higher interest rates and skyrocketing energy costs as the Middle East crisis continues to smash family budgets.<\/p>\n
The Reserve Bank of Australia is widely expected to raise the official cash rate on Tuesday and again at its May meeting \u2013 taking to three the number of rate rises this year.<\/p>\n
Treasurer Jim Chalmers is understood to be preparing for inflation to be in the high 4 per cent range as the war in the Middle East shows no signs of ending.<\/p>\n
And the Albanese government is urging Australians to avoid panic buying fuel amid rising prices and fears of shortages, as it acknowledges \u201creal risks in the supply chain\u201d for food and goods around the country.<\/p>\n
Oil shortages across the globe boosted fears of a return to the 1970s oil led stagflation event. <\/p>\n
Stagflation is a unique challenge when economies are battered by slowing growth and rapidly rising cost. Combined they smash household living standards. <\/p>\n
Over the last week, oil prices have skyrocketed as the conflict between the US and Iran led to the blockage of the Strait of Hormuz \u2013 a critical supply route that about 19 per cent of the world\u2019s oil passes through.<\/p>\n
At the time of writing, the Iranian government said the Strait of Hormuz must remain closed as a \u201ctool to pressure the enemy\u201d, while the US promised a navy escort through the waterway.<\/p>\n
Are we heading for stagflation?<\/p>\n
Rising oil prices over the last week renewed fears of a 1970s-style stagflation event, when the price of crude soars, while the economy slides into a recession. <\/p>\n
Betashares chief economist David Bassanese says the chances of stagflation in the US are rising.<\/p>\n
\u201cHigher US tariffs along with the crackdown on illegal immigration have both conspired to weaken labour demand and labour supply,\u201d he said.<\/p>\n
\u201cYet we can now add a third stagflationary negative supply shock \u2013 the war with Iran, which has already raised global oil prices by 30 per cent.<\/p>\n
\u201cWhatever the justification for this war, the hit to US energy costs will also act to dampen economic activity while boosting inflation.\u201d<\/p>\n
Despite these concerns, Westpac chief economist Luci Ellis said Australia was a long way from a return of the 1970s when an oil shock led to Australian living standards being smashed by stagflation.<\/p>\n
\u201cWorld economies are much less oil dependent than they were in the 1970s, especially advanced economies,\u201d she told NewsWire.<\/p>\n
\u201cA longstanding closure of the Strait of Hormuz would be extremely bad for emerging markets and low income countries because of the impact of fertiliser and food prices.<\/p>\n
\u201cOnce food prices escalate, that is when you get social unrest, so my expectation is if it drags on more than a few months, countries will take steps to make sure it opens.\u201d<\/p>\n
Domestically, it would take a long period of high petrol prices before Australia experienced a stagflationary environment. <\/p>\n
What oil shock means for rates <\/p>\n
Ms Ellis \u2013 who previously worked for the RBA for more than three decades \u2013 says the central bank will lift interest rates in March and May, even if the impact of rising oil is temporary.<\/p>\n
\u201cThis is a once bitten, twice shy situation,\u201d Ms Ellis told NewsWire.<\/p>\n
\u201cThey\u2019ve made it clear they want to get on with it and when they get the Q1 inflation data \u2013 on our estimates \u2013 it will be too high.\u201d<\/p>\n
All four major banks now predict interest rates will be lifted in both March and May, taking the cash rate to at least 4.30 per cent.<\/p>\n
If the prediction is accurate, all three rate cuts in 2025 will be undone in three consecutive meetings after the RBA began lifting the cash rate from February.<\/p>\n
While economists are focusing on three interest rate hikes in a row, the bond market is pricing in more pain for borrowers. <\/p>\n
It is pricing 68 basis points of additional rate hikes in 2026 that would take the cash rate to just under 4.60 per cent.<\/p>\n
This follows the RBA\u2019s first interest rate hike of 25 basis points in February and would take rates up by just short of 100 basis points over the year.<\/p>\n
\u201cThis aligns closely with expectations for three 25 basis point hikes in total, which would push the cash rate to 4.60 per cent by year end \u2013 its highest level since October 2011,\u201d IG market analyst Tony Sycamore said.<\/p>\n
The money markets have increased their rate hike expectations as a combination of the US\/Iran war and hawkish comments from the RBA spooks the bond market.<\/p>\n
\u201cThe escalating turmoil from the Middle East conflict and surging energy prices is poised to tighten its grip on Australian households, amplifying cost-of-living pressures at a time when inflation remains sticky,\u201d Mr Sycamore said.<\/p>\n
Cost of living about to surge<\/p>\n
In a blow to households already grappling with higher mortgage rates, the cost of living is also tipped to rise.<\/p>\n
Mr Chalmers told colleagues this week that Treasury\u2019s preliminary analysis of the impact of the war suggests headline inflation will be in the \u201chigh 4s\u201d.<\/p>\n
The updated inflation forecast will be part of the budget he hands down on May 12.<\/p>\n
Headline inflation, which includes volatile and seasonally adjusted prices, was at 3.8 per cent in January.<\/p>\n
AMP chief economist Shane Oliver told NewsWire that households could be confronted with a \u201cdouble whammy\u201d of higher rates and rising fuel costs.<\/p>\n
\u201cI suspect consumers will batten down the hatches and that means there is likely weaker spending ahead,\u201d he said.<\/p>\n
Mr Oliver said the RBA \u201cfaces several risks\u201d when it meets next week to decide on the next cash rate move in light of the recent global turmoil.<\/p>\n
\u201cOn the one hand if they don\u2019t hike and petrol prices continue to rise and that flows through to inflation and eventually inflation expectations, it makes it harder to get inflation back down,\u201d he said.<\/p>\n
\u201cThe flip side, though, households will see a hit to their spending power which will dampen spending elsewhere in the economy.<\/p>\n
\u201cSo underlying inflation might actually be depressed despite higher prices for oil and fertiliser.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"The war on Iran has added to the stress on Australian mortgage holders who now face higher interest…\n","protected":false},"author":2,"featured_media":537247,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[45,49,48,46,94291],"class_list":["post-537246","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-ca","tag-canada","tag-economy","tag-newswire-business"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/537246","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=537246"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/537246\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/537247"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=537246"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=537246"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=537246"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}