The Reserve Bank could deliver a fresh interest rate rise to borrowers within days, with the institution’s deputy governor warning the surge in oil prices caused by the war in Iran posed a substantial inflation risk.
Andrew Hauser said today it was a “clear problem” to allow inflation to get out of control, especially if it meant the nation’s consumers and businesses came to believe that price hikes were the new norm.
The RBA’s monetary policy committee meets on Monday and Tuesday. Financial markets had put the chance of a quarter percentage rate hike next week at a one-in-three chance, with most investors expecting the Reserve to hold steady until its early May meeting.
But Hauser made clear that inflation, which the bank had forecast to reach 4.2 per cent by the middle of the year, was likely to push higher because of the price of oil.
“Inflation is too high. Higher prices don’t help that debate,” he told the Politics with Michelle Grattan podcast.
“It’s fair to say, further increases of prices from Iran, if that is what we end up seeing, and that is a big if, is not a helpful development from the perspective of our policy discussion.”
Hauser said most economic data since the Reserve’s February meeting, at which it pushed the cash rate to 3.85 per cent, had been stronger than expected. But he also noted consumer spending had been a little softer than forecast.
The turmoil in oil prices, which on Monday alone surged to almost $US120 a barrel before retreating below $US90 a barrel, made it more difficult than normal to forecast how inflation and the economy would evolve.
Hauser said while higher oil prices could push up inflation, they could lead to a slowdown in economic activity that in turn would lead to a lift in unemployment.
“It’s worth us continuously reminding ourselves just how toxic inflation is. We’ve only just had an experience of that, and we don’t want to go through that period again,” he said.
“[But] 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.
“I think you are right to say the scale of both the upside and potentially the downside risk for us this month is probably rather larger than normal.”
Before Hauser’s comments, the Bank of America became the first major bank to predict the Reserve would lift rates next week. A quarter percentage hike would take the cash rate to 4.1 per cent.
Nick Stenner, the bank’s head of Australian and New Zealand economics, said the oil shock caused by the war posed a substantial inflation risk.
“Given above-target inflation and a tight labour market, we see no compelling reason to delay the inevitable,” he said.
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.