Mortgage Holders Face Five Rate Hikes by Christmas Amid Iran Conflict
Australian mortgage holders could be hit with five more interest rate increases by Christmas if the ongoing conflict in Iran remains unresolved, according to economic analysts. This stark warning comes as the nation's labour market shows resilience, with the unemployment rate holding steady at 4.3 per cent in March, as reported by the Australian Bureau of Statistics on Thursday.
Oil Price Surge Threatens Inflation Spike
A prolonged supply chain disruption stemming from the Middle East crisis could severely impact households and jobs, warns Harry Murphy Cruise, head of economic research at Oxford Economics. If the conflict lingers into the third quarter, crude oil prices could skyrocket to $US150 to $US160 a barrel, up from the current level of about $US100.
'Australia had an inflation problem well before this conflict kicked off,' Mr Murphy Cruise stated. 'So that's a tricky world to navigate and it could be even trickier if we see oil prices rise to that $US150 a barrel.'
Such a scenario would push underlying inflation, which excludes volatile items, much closer to six per cent, broadly aligning with pandemic peak levels. Currently, annualised underlying inflation stands at 3.3 per cent.
Reserve Bank Forced into Action
A further jump in inflation would give the Reserve Bank of Australia the impetus to hike the cash interest rate from its current 4.10 per cent. 'If we see oil prices move higher in that prolonged conflict scenario, that would push, or would force, the RBA to hike to five and a half per cent through this year,' Mr Murphy Cruise explained.
He emphasised the dire situation for households: 'All that is very bad news for households. Households are in a really tough spot at the moment. They are seeing inflation rise around them.'
Businesses Brace for Impact
The outlook is similarly grim for businesses. 'Businesses are scared. They don't know what the outlook looks like, and they've got higher input costs,' Mr Murphy Cruise noted. A survey of 828 company directors by Roy Morgan revealed that 41 per cent believe current interest rate levels will cause a major uptick in insolvencies, while almost nine in ten expect business costs to rise.
Mark Thirlwell, chief economist at the Australian Institute of Company Directors, highlighted the compounding challenges: 'While productivity concerns still dominate, the fuel and energy crisis unfolding as a consequence of the Middle East conflict will only intensify the challenges being felt in the economy.'
Economic Forecasts and Labour Market Trends
HSBC chief economist Paul Bloxham anticipates the central bank will hike the cash rate again at its May meeting. However, he cautioned that beyond May, the RBA's decisions will hinge on how quickly the economy weakens and whether this translates into significant job market deterioration.
Westpac economist Ryan Wells suggested that while higher fuel costs and interest rates will weaken the labour market, mass lay-offs may not occur. 'Since the 2000s, employers have typically opted to reduce average hours worked rather than headcount during labour market downturns in order to retain flexibility,' he said. Westpac projects the unemployment rate to reach a quarter average of 4.9 per cent by the second half of 2026.
Government Warning on Lasting Damage
Treasurer Jim Chalmers, speaking at a G20 finance ministers meeting in Washington, warned that the effects of the Iran war would linger. 'Lasting damage has been done and the recovery will be longer and harder than any of us would like,' he stated. 'We won't see everything go back to normal straight away. There is no normal anymore, and the fallout from this conflict will be felt for some time even if the ceasefire sticks and the Strait reopens soon.'
