The Reserve Bank of Australia (RBA) says the war in Ukraine is a major new source of uncertainty and, according to Gareth Hutchens*, inflation is expected to rise on the back of higher petrol prices and energy costs
The Reserve Bank has kept its cash rate target at 0.1 per cent, as it watches the unfolding economic fallout from Russia’s invasion of Ukraine.
It means the benchmark official interest rate has been steady at 0.1 per cent for 17 months.
In a statement, RBA Governor Philip Lowe said the global economy was continuing to recover from the pandemic, but Russia’s aggression in eastern Europe had complicated things.
“The war in Ukraine is a major new source of uncertainty,” he said.
“Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand.
“The prices of many commodities have increased further due to the war in Ukraine.
“Bond yields have risen over the past month and expectations of future policy interest rates have increased.”
More inflation coming
With the world’s energy system still heavily dependent on fossil fuels, analysts said the war in Ukraine would send a wave of inflation over the global economy.
Just last month, the RBA wrapped up its $350 billion bond-buying program citing better-than-expected economic data and rising inflation.
However, on Tuesday Dr Lowe said the RBA was forecasting underlying inflation to reach 3.25 per cent in coming quarters, putting it above its 2-to-3 per cent target.
He warned consumer inflation would “spike higher than this” due to higher petrol prices resulting from global developments.
“How long it takes to resolve the disruptions to supply chains is an important source of uncertainty regarding the inflation outlook, as are developments in global energy markets,” Dr Lowe said.
Late last year, the Bureau of Statistics said automotive fuel prices had increased in Australia by 25 per cent in the 12 months to October, making it “the largest contributor to higher living costs for Australian households”.
However, Dr Lowe said the RBA board was prepared to be patient as it monitored the various factors affecting inflation in Australia at the moment.
“While inflation has picked up, it is too early to conclude that it is sustainably within the target range,” he said.
“There are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply-side problems.”
House prices still rising
The RBA’s decision to keep the cash rate target at 0.1 per cent for the last 17 months has contributed to surging property prices.
Dr Lowe said housing prices were still rising strongly in Australia, but he also noted “the rate of increase has eased in some cities”.
It comes as CoreLogic data show national property prices rose again last month, by 0.6 per cent, but with Sydney dwelling values recording their first decline in 17 months, by a slight 0.1 per cent.
“Not much of a decline, the equivalent of about $1,000 at the median value level, but I think it’s definitely a sign that the market is shifting slightly from a sellers’ to a buyers’ market,” CoreLogic’s head of Australian research Eliza Owen told ABC News.
Last month, Commonwealth Bank economist Gareth Aird said there were probably over a million home borrowers in Australia who had never experienced an increase in mortgage rates.
What do economists say?
Dr Lowe said he would not increase the cash rate until actual inflation was sustainably within the 2 to 3 per cent target range.
However, a number of economists think the RBA will be forced to lift rates in a matter of months.
CBA’s economics team said the first rate rise could occur in June, but if there was further escalation in the Russia-Ukraine war the next most likely rate rise will be in August.
Marcel Thieliant from Capital Economics thinks the RBA will have to lift rates in June because it will be caught by surprise again by the pace of rising inflation.
But Brendan Rynne, KPMG Chief Economist, says Russia’s invasion of Ukraine will disrupt the post-pandemic global recovery and give other central banks a reason to reconsider aggressive monetary policy tightening.
“This in turn will provide space for the RBA to hold off commencing its tightening cycle too,” he said.
*Gareth Hutchens is a business and economics reporter based in Canberra. He can be contacted on Twitter at @grhutchens.
This article first appeared at abc.net.au
