Three more rate hikes tipped as prices begin to rise
Mortgage holders could face three interest rate hikes by Christmas as concerns grow over the impact of the Iran war on inflation, money markets say.
Rate traders raised their forecasts on Friday, pricing in another almost 75 basis point hike by the Federal Reserve by the end of the year, following hawkish meetings of global central banks overnight.
Pessimistic comments from the European Central Bank and the Bank of England, coinciding with further attacks on liquefied natural gas infrastructure in the Middle East, have raised fears that the conflict will further exacerbate Australia’s inflation problem.
If money market forecasts are confirmed, the Central Bank’s cash rate will end 2026 at 4.85 percent, the highest level in the last 18 years, adding to the misery of mortgage holders.
On Thursday, markets were pricing close to two increases in 2026.
IG market analyst Tony Sycamore said that if the war continues for a long time, there is a high probability that interest rate increases will continue in September and December, in addition to the increase in May.
In addition to the primary impact on fuel prices, rising energy costs also contribute to second-order effects as inflation spreads across the economy.
A project manager for one of Australia’s leading construction companies said he had received about 25 emails from contractors since the start of the conflict informing them they would increase prices due to rising fuel costs.
“Our construction contractor has already approached him and thinks he’s spending $7000 more a week on his factory,” the project manager, who was not authorized to speak publicly, told AAP on Friday.
“That was earlier this week, so it’s probably more now.”
Another contractor’s email, seen by AAP, said all new contracts for the transportation of rental equipment would be subject to a 20 per cent fuel surcharge.
“The ongoing conflict in the Middle East is impacting global fuel supplies and increasing market prices,” the email said. it said.
“These actions are vital to ensure we continue to provide reliable service and maintain operations despite current market pressures.”
Before the start of hostilities, construction costs were already a concern for the Central Bank.
The annual increase in new home prices rose from three percent to 3.5 percent in January as project home builders began to incur higher labor and material costs.
Belinda Allen, Commonwealth Bank’s head of economics for Australia, said her team had heard similar feedback about rising costs being cited in meetings with businesses in sectors such as mining and construction.
“Anyone currently sending things to Australia, particularly materials, is facing higher costs,” he told AAP.
“The challenge for Australia this time, of course, is that we were already facing higher costs and stronger demand, so we’re adding to that pressure.”
Mr. Sycamore said that because fuel is an economy-wide input, rising prices are reflected throughout the economy, from transportation costs to groceries.
“This is a butterfly flapping its wings,” he said.
“It starts in the Middle East and spreads all over the world. The situation is no different in our economy.”
In a statement on Friday, Coles said oil prices were putting “significant cost pressure” on transport providers.
The supermarket giant said it would review the fuel component of freight rates more frequently and reduce payment terms for smaller providers to help transport contractors manage rising fuel costs.
