IMF warns Australia cannot escape oil shock as Reserve Bank flags further rate rises

Mortgage holders are being warned they’ll have the double whammy of higher interest rates and oil prices, as the Reserve Bank is unable to look through the oil price shock. In a press conference overnight, the International Monetary Fund (IMF) said Australia’s inflation is simply too high coming into war between the US/Israel and Iran. IMF director of Asia and Pacific departments Krishna Srinivasan said while some economies can look through the price shock, Australia does not have that luxury. “The scope to look through the shock is more limited in economies where inflation is already above target and pressures remain firm, such as in Australia,” Mr Srinivasan said. The IMF noted some economies could absorb higher prices over the near-term, but warned a prolonged energy shock could weaken currencies and generate more persistent inflation through exchange rate pass-through and broader second-round effects. This followed similar warnings from Reserve Bank of Australia deputy governor Andrew Hauser who noted inflation was already above target before the war in the Middle East began. “Starting conditions matter a lot. In Australia, we went into the Iran shock, already running quite hot, and that created some challenges,” Mr Hauser said. Mr Hauser grimly warned Australians would be poorer with the central bank having little it could do to quash inflation over the short term. He said it was important to quash inflation expectations to stop a repeat of the 1970s, when an oil shock led to surging inflation, while also highlighting the need to communicate the challenges Australia faces. “Supply shocks are a hard sell to the public,” Mr Hauser said. “Inflation is going to be higher, activity is going to be low, we’re going to be poorer. There’s not much upside news in that story. “That’s harder at a time when we’ve had high inflation already, and people are already a bit resentful about that.” The Reserve Bank of Australia has already lifted interest rates in February and March, by a total of 50 basis points, taking the cash rate to 4.10 per cent. It is widely predicted to lift interest rates again following its May 4-5 meeting, completely reversing 2025 three interest rate cuts. NED-9108-Monthly-Inflation-Indicator The conflict between the US/Israel and Iran has led to the blockage of the Strait of Hormuz, a critical waterway where one-fifth of the world’s oil once passed daily. This has created an oil price shock with the price of crude surging in the seven weeks of the conflict from around $US56 ($A80) a barrel, to near $US100 ($A143) a barrel. For every $10 increase in the price of oil, roughly equals 10 cents more Australians pay at the fuel pump. The latest IMF warning followed a report released earlier in the week which painted a grim economic forecast for the Australian economy, with the country being “tested’ by higher oil prices and cost of living pain. The group predicts Australia’s inflation will remain above the Reserve Bank’s 2 to 3 per cent target range for at least another two years – rising to 4 per cent in 2026, before cooling to 3.2 per cent in 2027. At the same time real gross domestic product – which is economic outlook minus inflation – is tipped to slow to just 2 per cent in 2026 before sliding to 1.7 per cent in 2027. Don’t overspend in crisis The IMF also used its press conference to warn countries in the Asia Pacific region spending big through the current oil crisis. “Fiscal policy requires a careful balancing act. Prudence matters more than the past, as interest costs are rising, debt levels are higher, and fiscal space is narrower, Mr Srinivasan said. “This means that where needed, fiscal support should be temporary, with sunset clauses targeted to vulnerable households and viable firms.” In late March Anthony Albanese announced a 50 per cent reduction in the fuel excise for three months would reduce the cost of fuel by 26.3 cents per litre, meaning a $16 saving when filling up a 60-litre tank. He also temporarily scrapped the heavy vehicle road user charge to “help truckies continue their vital work for our nation”. The next day Treasurer Jim Chalmers said the measures allowed motorists some cost-of-living relief at a difficult time. “It is timely, it is temporary, it’s responsible and it recognises it is not the fault of Australian motorists and truckies that there is a war in the Middle East which is dramatically pushing up petrol prices at the bowser,” he told reporters. Budget ‘hostage’ to war Emerging from talks with G20 counterparts in Washington, Mr Chalmers said on Thursday (Friday AEST) that he and his fellow economy chiefs expected the financial fallout of the conflict to worsen before it improved. He warned that “even when there is a proper end to this war and the Strait of Hormuz opens again, it’s expected to take some time before the global economy normalises”. “There is an expectation around the G20 that this thing has a little way to run yet, and that it’s entirely possible that it will get harder in the global economy before it gets easier,” he told a press conference, adding that his meetings was “an opportunity to compare notes and forecasts as we put the Budget together and release it in May”. “We’re putting this budget together in very uncertain, very unpredictable, very volatile global conditions,” Mr Chalmers said. “It will be a responsible budget based on resilience and reform. It will strike the right balance between the pressures on people in the here and now and our intergenerational responsibilities. “I’m confident that we’ll get those balances right, but I’m not complacent about it because we are hostage to developments in the Middle East.”