Reserve Bank boss issues a warning to Australia about how the Middle East war could impact you
The head of the Reserve Bank of Australia has warned a Middle East conflict poses a double-edged risk – higher inflation from supply shocks or weaker growth if the crisis lingers.
Crude prices spiked by up to 13 per cent on Monday after conflict in Iran – one of the world’s largest oil producers – also threatened to shut off supplies from other Middle Eastern nations.
This could mean Australians see petrol prices increase, which will add to overall inflation – a key measure affecting interest rates.
Reserve Bank governor Michele Bullock said on Tuesday that the bank was ‘very alert’ to the situation.
‘It’s too early to say what the impact will be, events are moving rapidly and there are different ways this can play out,’ she told the Financial Review Business Summit.
‘A supply shock could, for example, add to inflation pressures.
‘At the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation. It is not obvious how this might play out.
‘The potential implications for inflation expectations are something we are very alert to.’
Head of the Reserve Bank of Australia Michele Bullock has warned a Middle East conflict poses a double-edged risk – higher inflation from supply shocks or weaker growth if the crisis lingers
Crude prices spiked by up to 13 per cent on Monday after conflict in Iran threatened to shut off supplies from other Middle Eastern nations (pictured, a view of Tehran, Iran, after explosions)
A satellite image of the Strait of Homruz following US-Israeli strikes against Iran
The Reserve Bank of Australia’s first household survey of its kind shows inflation worries outweigh concerns about jobs and personal finances.
‘While measures of longer-term inflation expectations remain stable, near-term expectations have increased a little over the past six months,’ Bullock said.
‘We are alert to this risk, and we closely monitor expectations using surveys, our business and community liaison program, and financial market-based measures.’
Given oil’s role as an economy-wide input, a price surge threatens to have an outsized impact on global inflation, which is already running well above the Reserve Bank’s target.
In the worst-case scenario – in which the US becomes mired in a prolonged conflict with Iran and oil supplies are disrupted for longer – oil prices could double to about $US150 a barrel, AMP chief economist Shane Oliver said in a research note.
He ascribed a 40 per cent probability to such a scenario.
The Reserve Bank of Australia will meet on March 16 to make a decision on where to next for interest rates.
Ms Bullock said data released since February supports last month’s rate rise.
‘A range of indicators tell us that labour market conditions are still tight,’ she said.
‘And it is uncertain whether financial conditions are sufficiently restrictive to return inflation to the midpoint of the target in a reasonable timeframe.’
The Reserve Bank’s forecast showed modelling the direction of the economy was hard enough without geopolitical flashpoints.
Data can send mixed signals.
Hard-to-foresee shocks such as the COVID-19 pandemic and global conflict made it important for the bank to supplement its models by listening directly to households and businesses, Ms Bullock said, highlighting how murky setting monetary policy could be.
