The likelihood of a Reserve Bank of Australia interest rate hike has doubled according to market forecasts, as the escalating Middle East crisis drives fuel prices higher amid dwindling global oil reserves. The total breakdown in the fragile ceasefire between the United States and Iran has sent the international Brent crude benchmark surging by 23% over the past two weeks, back within reach of $90 a barrel.
Fuel costs climb for Australian motorists
Australian motorists face climbing fuel costs, though without the panicked buying and shortages seen at the start of the US-Israel war on Iran in early March. Diesel, most exposed to global disruptions, has jumped 40 cents in July to about $2.10 a litre in major east coast cities, according to Motormouth. Unleaded petrol rose 25 cents to about $1.75, partly due to the removal of some federal fuel excise relief from the start of the month.
Market bets on rate hike increase
Traders in financial markets are upping bets that the Reserve Bank could be forced to hike rates for a fourth time. Markets now place a nearly 30% chance of an interest rate rise on 12 August, up from 16% two weeks ago. The probability of a hike by November has doubled to 80% over the same period, according to ANZ.
Economists warn of stagflationary impact
Luke Yeaman, CBA's chief economist, said a total lack of trust between the warring parties made it difficult to judge the trajectory of the escalating conflict, which he said would send a fresh stagflationary pulse through the Australian economy. "In the current dynamic, we believe this will drag on for at least several weeks and possibly longer," Yeaman said. He warned global oil prices could push as high as $150 a barrel if no negotiated solution was reached by late August or early September, conjuring worst-case scenarios from the first phase of the conflict.
Critical juncture for global energy market
Daniel Hynes, a senior commodity strategist at ANZ, said the drop in oil prices during the ceasefire into the low 70s had not reflected the structural hit to global supply and the system's "fragility", and that $80 to $90 a barrel was a more realistic level. "The $100-a-barrel mark would potentially be within sight if we are here in a few weeks' time and things have gotten worse," Hynes said. He noted that technical limits on how low oil inventories can go without triggering infrastructure breakdowns were already being breached in the United States, pushing buyers to look further afield and increasing competition for scarce seaborne cargoes.
Impact on Australian economy
Higher energy prices and renewed global conflict are set to further drag on an Australian economy already slowing sharply under the weight of three interest rate hikes and a falling housing market. Yeaman forecast economic growth to slow to 1.5% by the end of this year, from 2.5% in 2025. "Were you to see a serious escalation in the conflict and a prolonged closure of the strait [of Hormuz], then growth could slow much more sharply," he said. Yeaman said he was sticking to his forecast for no more rate rises this year, but noted a prolonged closure of the Strait of Hormuz and a big jump in oil prices could strengthen the case for one further rate hike, though calls for multiple hikes were "a little overblown." He expected the government would step in to shield households by reinstating the full fuel excise discount if oil prices spiked again.
