Australian Mortgage Rates May Rise as Middle East Oil Crisis Continues

A tanker attack in the Middle East has led to higher oil prices and increased inflation, which could eventually affect Australian mortgage rates. The European Central Bank raised its key interest rate by 25 basis points to 2.5 percent in response to the energy-price shock.

The ECB's decision shows how an external energy shock can become a domestic inflation problem if it persists. Higher oil prices lead to increased transport and input costs, which can push up consumer prices and wages.

Central banks can tolerate temporary fluctuations in energy prices but not persistent shocks that embed themselves in the domestic price structure. The ECB's rate rise will not produce more oil or reduce war-risk insurance premiums, but it will suppress demand elsewhere in the economy.