The Reserve Bank of Australia has warned escalating conflict in the Middle East poses a twin threat of either spiking inflation or choking economic growth.
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 could face increased petrol prices, 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 evolving 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 inflationary 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)
NRMA spokesperson Peter Khoury warned on Monday that Australians could face a sustained price hike on fuel if the Strait of Hormuz, the gateway for a fifth of the world’s oil supply, remains closed.
‘The message to Australian drivers today is this: please do not panic,’ he told 9News.
‘In the first instance, whatever happens overseas takes about 7-10 days to flow on here at home.
‘So we should not see an impact at the bowser immediately, and only then if things are sustained over a period of time, and we don’t see that jump stabilise and prices come back again.’
The RBA’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 the role of oil in an economy-wide input, a price surge threatens to push up global inflation, which is already running well above the Reserve Bank’s target.
NRMA spokesperson Peter Khoury warned Australian consumers could face a sustained price hike on fuel if the Strait of Hormuz (pictured) remains closed
In the worst-case scenario – in which the US becomes mired in a prolonged conflict with Iran and oil supplies are disrupted for an extended period – oil prices could double to about $US150 a barrel, AMP chief economist Shane Oliver warned.
He ascribed a 40 per cent probability to such a scenario.
The Reserve Bank of Australia will meet on March 16 to decide its next interest rate move.
Ms Bullock said data released since February support 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.’
Hard-to-foresee shocks such as the Covid pandemic and global conflict make it important for the bank to supplement its models by listening directly to households and businesses, Ms Bullock added.
