Dire warning for Aussie borrowers if Iran war drags on
If a solution to the Iran war is not found soon, mortgage holders could face five rate hikes by Christmas.
Data released by the Australian Bureau of Statistics on Thursday showed the country’s labor market was still in good shape and the unemployment rate remained steady at 4.3 per cent in March.
But a prolonged supply chain disruption would severely impact households and jobs, according to Harry Murphy Cruise, head of economic research at Oxford Economics.
If the Middle East crisis continues into the third quarter, crude oil prices are expected to rise from US$100 to US$150 to US$160 per barrel.
“Australia had an inflation problem long before this conflict began,” Mr Murphy Cruise said.
“So this is a difficult world to navigate, and if we see oil prices rise to $150 per barrel it could get even trickier.
“This would push headline inflation much closer to six percent overall, in line with the peak of the pandemic.”
Annual headline inflation, which excludes variable items, is currently at 3.3 percent.
A further jump would give the Reserve Bank of Australia the impetus to raise the cash rate from 4.10 per cent.
“If we see oil prices rising in a protracted conflict scenario, that could push or force the RBA to raise interest rates by five and a half per cent over the course of this year,” Mr Murphy Cruise said.
“This is all very bad news for households. Households are in a really tough spot right now. They’re seeing inflation rising around them.”
Mr Murphy Cruise said the situation was similar for businesses.
“Businesses are scared. They don’t know what the outlook is and input costs are higher,” he said.
A survey of 828 business executives by Roy Morgan found that 41 percent of respondents believe current interest rate levels will cause a large increase in bankruptcies and almost nine in 10 expect business costs to rise.
“While productivity concerns still prevail, the fuel and energy crisis as a result of the conflict in the Middle East will only intensify the challenges being felt across the economy,” said Mark Thirlwell, chief economist at the Australian Enterprise Institute Directors.
HSBC chief economist Paul Bloxham expects the central bank to raise interest rates again at its May meeting.
“However, beyond the May meeting, we expect the RBA’s decision to depend on how quickly the economy weakens and, more importantly, whether there are signs that this is fueling a significant weakening in the job market,” he said.
But Westpac economist Ryan Wells said higher fuel costs and interest rates would weaken the labor market but might not result in mass redundancies.
“Since the 2000s, employers have preferred to reduce average working hours rather than headcount during labor market downturns to maintain flexibility,” he said.
“So barring a severe recession, we are likely to see a larger decline in average working hours this year, along with a slowdown (not a decline) in employment.”
Westpac expects the unemployment rate to reach a quarterly average of 4.9 per cent by the second half of 2026.
It came as Finance Minister Jim Chalmers warned the effects of the Iran war would continue, speaking to the G20 finance ministers meeting in Washington overnight.
“Permanent damage has been done and the recovery will be longer and more difficult than any of us would like,” he said.
“We will not see things return to normal immediately. There is no normal anymore, and even if the ceasefire holds and the Straits reopen soon, the effects of this conflict will be felt for some time.”
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