RBA to Deliver Back-to-Back Hikes as Iran War Refuels Inflation

kh[ctksfzlgwp19y2664druk_media_dl_1.png RBA, Bloomberg

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(Bloomberg) — When Australia’s central bank convenes this week for its second interest-rate decision of the year, the board will find its current inflation problem further exacerbated by an energy price shockwave rippling out from a Middle East driven by war.

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The Reserve Bank will deliver back-to-back hikes at 2:30 p.m. on Tuesday in Sydney to take the cash rate to 4.1%, economists predict, on fears the surge in oil will drive consumer prices even higher. Money markets are pricing a three-in-four chance of a rate rise in March and see more tightening to come.

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“The Iran conflict introduces a material upside inflation risk, and our current estimates suggest headline inflation will approach 5%,” said Nick Stenner, economist at Bank of America Corp. The central bank targets consumer-price gains at the midpoint of a 2-3% target.

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Stenner said the RBA has “limited room” to look through the shock, given the existing trajectory of price pressures and a tight labor market. Not hiking in March, he said, “increases the risk of a more disruptive tightening later as higher-for-longer inflation becomes embedded in people’s expectations.”

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Hike expectations have been driven by the spiraling Middle East conflict that has seen Iran strike energy-rich Gulf states in response to a US-Israeli air attack. Oil has surged and the fighting has disrupted air travel and flows of fertilizer and other goods at a time when the RBA was already fretting over inflation. 

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Most economists expect a follow-up hike in May to lift the cash rate to 4.35%. The last time the RBA delivered three consecutive rate rises was April-to-June 2023 and Governor Michele Bullock’s press conference an hour after Tuesday’s announcement will be closely watched for clues on the outlook. 

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Last month, the RBA became the first major monetary authority in the developed world to tighten policy this year, reflecting concerns inflation could become entrenched if settings aren’t sufficiently restrictive. 

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Since that meeting, the deepening Iran war has threatened to further de-anchor inflation expectations. In February, the RBA forecast CPI would peak at 4.2% this year on a technical assumption that crude would remain at $63.8 per barrel through mid-2028 and the cash rate would sit at 4.2% in December.

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Yet the decision is not completely straightforward, as a minority of economists holding out for a May move — when the RBA will have quarterly inflation data and updated staff forecasts — will attest. Last week, Deputy Governor Andrew Hauser framed the challenges for Australia’s policymakers.

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Pre-war, the RBA had inflation returning to near the midpoint of its target band in a couple of years’ time. The key question, Hauser said, is how incoming data — both domestic and global — alters that picture.

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Recent readings point to upside risks: 

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