Reserve Bank of Australia Governor Michele Bullock is warning inflation will stay elevated as the Middle East conflict escalates amid universal expectations of another rate hike.
A day after the US Federal Reserve raised interest rates for the first time in three years, Australia’s most powerful central banker told MPs higher crude oil prices were likely to affect a broad range of consumer goods.
“Higher oil prices have increased inflation directly through their impact on petrol prices but it’s also had an indirect impact as many firms have passed input cost pressure arising from elevated fuel prices through to the prices of other goods and services,” she told the House of Representatives economics committee in Canberra on Friday.
“Because of these capacity pressures and the Middle East conflict, inflation is likely to remain elevated for some time.”
The effects appeared to be worse than initially expected in late February, when the US and Israel fired rockets on Iran, with basic unleaded petrol now typically selling for more than $2.30 a litre.
“I think we’ re now in a very similar position to other countries, in the sense that we’ve still got a bit of excess demand and now we’ve got this extra impetus from a prolonged Middle East conflict and that is putting pressure on prices in Australia to the extent that businesses thought that maybe it would be short-lived, and they could perhaps wait and see whether they would pass cost increases through,” Ms Bullock told Labor MP and committee chair Ed Husic.
“Now, they’re seeing a prolonged period. I think there’s much more of an inclination to think that we need to pass through these cost increases because it’s going to be much more persistent.”
Crude oil prices this week hit $US105 a barrel for the first time since early May after Iran-war militia groups fired drones on Saudi Arabia’s East-West pipeline connecting the Persian Gulf with the Red Sea as an alternative to the blockaded Strait of Hormuz.
Inflation eased marginally in July to 3.5 per cent but it remained above the Reserve Bank’s 2-3 per cent target for the 12th straight month and financial markets are expecting at least another interest rate rise by November 3, following the release of more comprehensive September quarter inflation data.
The futures market is now regarding a hike as an 82 per cent chance, that would take the cash rate to a 15-year high of 4.6 per cent.
The RBA meets again on September 28 and 29 with the next decision occurring a day before the Australian Bureau of Statistics releases August inflation data.
The Reserve Bank isn’t expecting headline or underlying inflation to fall back within its band until mid-2027, by which time the consumer price index would have been above target for almost two years.
More to come
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