A senior Reserve Bank official has warned that soaring fuel prices driven by the conflict with Iran are 'making us all poorer', and signalled that the central bank may need to raise interest rates again to prevent inflation from spiralling out of control.
Chris Kent, an assistant governor at the RBA, said that while a negative supply shock typically argues against further rate rises, the central bank must ensure that the initial price surge does not lead to entrenched inflationary expectations. Consumer price growth stood at 3.7% in the year to February, well above the RBA's 2.5% target, and economists warn inflation could hit 5% by mid-year due to rising petrol prices.
Kent noted that the fuel-linked inflationary spike could 'necessitate a more restrictive stance of policy', meaning higher interest rates. Financial markets currently see a 65% chance of a rate hike in May, with further increases anticipated by June and September.
The warning came as the Albanese government said it would back an 'economically sustainable' above-inflation minimum wage rise for 2.7 million workers. Employment Minister Amanda Rishworth rejected claims that the government's recommendation to the Fair Work Commission would fuel inflation, stating that wages are not a key driver of recent price pressures.
Treasurer Jim Chalmers revealed he has asked Treasury officials to model the economic impact of global oil prices climbing above US$120 a barrel for an extended period, compared with just above US$100 now. 'The end of this war can't come soon enough for the economy,' he said.
Kent acknowledged that the longer the conflict persists, the greater the economic impact and the risk of a material repricing of assets. The RBA will continue to assess countervailing forces to set monetary policy that achieves low and stable inflation and full employment over the medium term.
