Interest rate hike ‘no slam dunk’ amid Iran uncertainty
The last time the United States engaged in military intervention in the Middle East, then-Secretary of Defense Donald Rumsfeld pondered the challenges of the unknown unknowns.
Two decades later, unknown unknowns are complicating matters for the Reserve Bank of Australia as Donald Trump declares war on Iran instead of Iraq.
Until a week ago, the central bank was expected to keep interest rates steady at its March board meeting, which ended on Tuesday.
But this has changed with the conflict in the Middle East, which has blocked the passage of oil through the Strait of Hormuz, amid scenes of tankers being set on fire in the Persian Gulf.
Analysts warn that benchmark oil prices could soon exceed $150 per barrel and inflation, already at 3.8 percent, could move further away from the Central Bank’s 2 to 3 percent target band.
What will happen to oil prices is what Mr. Rumsfeld would call “the unknown unknown”; such as the effects of February’s surge on Australian consumers and how long the Strait of Hormuz will remain closed.
HSBC chief economist Paul Bloxham said the Reserve Bank did not know the extent to which these concerns would increase inflation but was more concerned about high inflation than growth, as deputy governor Andrew Hauser noted in a recent podcast interview.
“The market took this interview as a guide that an increase in March was more likely than not,” Mr Bloxham said.
Mr. Trump’s unpredictability means that guessing is a game.
Finance Minister Jim Chalmers said scenarios were being modelled, with inflation peaking at mid-to-high quadruple levels due to the US war against Iran.
“The source of the most extraordinary volatility in our forecast and in the economy is how long the Iran war will last,” he told Sky News on Sunday.
“We already know this is a significant shock.”
The situation may change completely by the time the Central Bank board locks in on Monday morning and announces the cash rate at 14.30 on Tuesday.
AMP chief economist Shane Oliver said the Reserve Bank should keep the cash rate at 3.85 per cent given the uncertainty.
“But we now think the RBA will increase on Tuesday,” Dr Oliver said.
The bank said it was concerned that the impact of the war on oil prices would increase inflation expectations and make it more difficult to reverse the price increase.
The big four banks are predicting a rate hike in May, which would bring the cash rate back to 4.35 percent; this was the level before the Central Bank’s first interest rate cut in February 2025.
The central bank will publish its biennial Financial Stability Review on Thursday, while the Australian Bureau of Statistics will publish employment data.
Dr Oliver expects the workforce survey to show a 25,000 increase in employment, but for the unemployment rate to rise slightly to 4.2 per cent.
Wall Street investors, like everyone else, are considering the impact of the war in Iran on global oil supplies as unstable prices negatively impact stocks.
All three major U.S. stock indexes fell on Friday and throughout the week.
Dow Jones index decreased by 119.38 points (0.26 percent) to 46,558.47 points, S&P 500 index decreased by 40.43 points (0.61 percent) to 6,632.19 points and Nasdaq decreased by 206.62 points (0.93 percent) to 22,105.36 points.
Australian stock futures fell 61 points, or 0.70 percent, to 16,387 points.
The S&P/ASX200 fell 11.9 points, or 0.14 percent, to 8,617.1 points on Friday, while the All Ordinaries index lost 12.3 points, or 0.14 percent, to 8,839.1 points.
This ended the local market’s second consecutive week of losses and its worst two weeks since mid-2022.
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