Australian households face prospect of interest rate hike and petrol prices rising above $2 a litre | Reserve Bank of Australia

Economists are warning that Australian households face the prospect of a Reserve Bank rate hike and petrol prices rising above $2 a liter in the coming weeks as the escalating Middle East crisis pushes global crude oil prices above $100 a barrel.

Financial markets now see an equal chance of the RBA board delivering a fourth cash rate hike at its next meeting on 11 August.

Warwick McKibbin, director of the ANU’s Center for Applied Macroeconomic Analysis, said crude oil prices were likely to remain high for “at least a year” as the US-Iran war enters a new and more dangerous phase.

The Houthis’ blockade of Saudi Arabian oil across the Red Sea and the Ukrainians’ increasingly successful destruction of Russian energy infrastructure are putting further pressure on global oil supplies, McKibbin said.

“Access to materials looks different now than it did a few months ago. Especially in the US, all reserves have been exhausted. This is a pretty serious situation the world is in.”

According to Motormouth, the gradual reduction of the government’s fuel duty cut to 16 cents a liter and a 37% increase in the international benchmark Brent crude this month have lifted the cost of unleaded oil to $1.80, up from the recent low of $1.50 at the beginning of the month.

Johnathan McMenamin, senior economist at Barrenjoey, said higher global prices and the end of the remaining fuel consumption discount after August 2 meant unleaded fuel would rise above $2 a liter in the coming weeks.

“This is an uncomfortable level for households, but it’s not something we’re too unfamiliar with,” McMenamin said.

Diesel prices rose about 50 cents in July to about $2.20 per gallon in major East Coast cities.

Rising fuel prices will deal another blow to the Central Bank’s efforts to reduce inflation while managing the damage caused by high energy costs to the economy.

McMenamin believes the central bank will pull the trigger next month; He held this view even before the recent developments in the Middle East.

“People will start to see fuel prices rise again and the concern will be for inflation expectations to rise once again among households and businesses,” he said.

“It doesn’t matter how long the oil price is at $100 per barrel; if it stays there for just a few days and reverses quickly, then that will provide some relief.

“But clearly we’ve all lost confidence in where this is going. [the oil price] It will be in six months.”

With the economy already slowing sharply, not all economists are convinced the RBA should raise rates again.

Sally Auld, NAB’s chief economist, said she never assumed the sharp decline in oil prices during the ceasefire was sustainable, even if there was no major escalation in conflict.

“But before it calmed down in March and April, we thought it would just be a big spike. Now it looks like it’s going to be more of a grind, or maybe small spikes,” Auld said.

Auld said inflation was still very high but slightly below the RBA’s forecast level, while unemployment was slightly higher. He said this combination would be enough to keep the RBA on hold while it waits for the slowing economy to ease the pressure of price pressures.

Auld warned that not all Australians could cope with high borrowing costs and rising fuel costs.

“If you get an intensification of cost-of-living pressures plus another rate hike, that becomes quite a challenge for a certain segment of households and you start to worry that the economic adjustment is not going to be that good.”