If oil prices continue to remain elevated, Australians can expect headline inflation to lift to 5% in just a few months.
The minutes from the Reserve Bank of Australia’s (RBA) March meeting, released Tuesday, say oil costs around US$100 per barrel would lift headline inflation to around 5% in the year to June.
It’s concerning news for Aussies, with the cash rate higher than 4.8% having not been seen in the country since the end of 2008 during the Global Financial Crisis.
The 5% figure is what the RBA has called a ‘quick estimation’ rather than a fully updated set of forecasts, with the fast-moving Iran war leaving little space for the bank to plan ahead.
The cash rate was raised by 25 basis points to 4.1% on 17 March following the first two weeks of United States-Israel coordinated attacks across Iran.
New insights from the central bank now suggests the uncertainty around the length of what has now been a month-long conflict is “likely to pose a material adverse supply shock to the global economy” in the next few months.
The jump in global oil prices after escalating military strikes by the US and Israel on Iran have driven oil above 100 dollars a barrel. Picture: George Chan/Getty Images
While the RBA used the statement to warn that it could not stop inflation increasing in the near-term, it had a positive message for Aussies feeling the pressure.
Well-timed cash rate decisions, it stated, could mean the RBA is able to lower the risk that high fuel prices will turn into long-term high inflation.
While this confidence in monetary policy sounds promising, swift and accurate decision making from the RBA will rely on strong certainty and consensus from board members.
This month’s rate rise was only narrowly approved however, with four of the nine RBA board members voting in favour of a hold.
The RBA board struggled to agree on a decision at its March meeting. Picture: NCA NewsWire/Christian Gilles.
“While they agreed that financial conditions would probably need to become more restrictive, they felt there was merit in delaying any tightening of monetary policy until the potential effects of the current conflict in the Middle East become clearer,” the statement read of the four ‘hold’ voters.
“The case to keep the cash rate target unchanged at the current meeting centred on concerns about the effect of heightened uncertainty on the outlook for the economy.
“This uncertainty could mean that the potential benefits of waiting for a little more information outweighed the potential costs.”
High inflation
The RBA’s forecast at its February meeting had been for inflation to continue to remain above target, following the pattern observed since October last year.
Inflation has been high in Australia for six months. Picture: Getty
Since then, the board says data suggests that the job market has become slightly stronger and more competitive for workers.
The statement also reveals that the bank thinks financial conditions are not especially restrictive, meaning the economy hasn’t slowed as much as expected after February’s hike.
“It was already clear that global energy production and distribution had been disrupted significantly and that there had been considerable increases in the global prices of oil and natural gas,” it stated.
“Higher petrol prices would flow through directly to headline inflation in Australia and globally in the near term. Sustained higher oil prices would also boost inflation more broadly over time.”
Trimmed mean inflation, used to help decide the cash rate, is currently sitting at 3.4%, outside of the RBA’s target.
Global fears
The RBA has warned it’s not just Australia feeling the pressure, saying rate rise forecasts are up in “almost all economies” off the back of the Middle East conflict.
That includes the central banks in the US and the United Kingdom, which had been expected to lower interest rates in 2026.
The Bank of England. Picture: Getty
“Other countries were also seeing underlying inflation remaining somewhat above their central banks’ targets,” it stated.
The statement revealed the RBA’s key focus is showing “clear commitment” to returning inflation to target, sending a clear message that more hikes are just around the corner.
“If medium- and long-term inflation expectations increased, it would ultimately require significantly more contractionary monetary policy,” the board warned.
All four of Australia’s biggest banks are anticipating a rate rise when the board next meets on 5 May.
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