Trump can pull the trigger on future rate-rise pain
The Central Bank board of directors was expected to increase interest rates again.
Finally it was the photo finish.
The central bank’s monetary policy board voted 5-4 in favor of a 25 basis point rate hike on Tuesday, taking the official cash rate to 4.1 percent.
This was the narrowest decision since the RBA began publishing the votes.
But Gov. Michele Bullock said the divide did not stem from a disagreement over whether to give a raise.
The debate was about timing.
The board agreed that demand in Australia was too high for supply even before the conflict in the Middle East closed a key oil artery and added a new supply shock to the system.
However, Ms Bullock explained that the four opponents wanted more time to assess the situation, given the uncertainty around the geopolitical situation and the speed at which events were changing.
Westpac chief economist Luci Ellis said the split decision made a third consecutive rate hike appear less certain, but maintained her call for a May rate hike because the issue was about timing.
“It is vitally important whether the conflict in the Middle East continues and how it develops from here,” he said.
Only US President Donald Trump can know whether the war will still continue in May. In the event of a prolonged conflict, commodity analysts have warned that benchmark oil prices could rise above US$150 per barrel.
This would add more than 80 cents per liter to pre-war oil prices, causing inflation to ripple across all areas of the economy.
On the other hand, the longer the war lasts, the higher the risk of economic crisis.
“Another possibility is that developments in the Middle East, particularly the sharp rise in oil and gas prices, will lead to further global crises that are reflected in Australia,” said Paul Bloxham, chief economist at HSBC.
“Our basic view is that the RBA should tighten further, with an increase planned for May. However, there is significant risk around this view, particularly given current global uncertainties.”
Australia’s labor market still looks strong, but Ms Bullock said the bank did not want to see a recession or a big rise in unemployment if it could be avoided.
“If the world economy and Australia appear to be in major distress, that will have different impacts on inflation and we will look very carefully at what we need to do in those circumstances,” he said.
Finance Minister Jim Chalmers said developments in the Middle East were making Australia’s inflation problem worse.
“The impacts of what we’re seeing in this part of the world are already significant, but we don’t yet know how persistent these very significant economic pressures will be,” he told reporters in Canberra.
“This largely depends on how long the conflict in the Middle East will last,” he said.
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