The Reserve Bank of Australia (RBA) faces a daunting challenge as the war against Iran continues to push up oil prices, threatening to keep inflation elevated. Senior sources within the bank have expressed concerns that oil prices, which closed last week at $US106 a barrel, show no signs of falling as the conflict spreads to Saudi Arabia and the Gulf of Aden. This poses a significant dilemma for the RBA ahead of its critical meetings before Christmas: whether to raise interest rates further to combat inflation or risk higher unemployment as the economy slows.
The RBA's economic forecasts, set to be updated next month, were based on oil prices being $US20 a barrel lower. Diesel prices, a major concern for central banks due to their impact on transport, manufacturing, and food production costs, have surged to levels seen at the start of the Russia-Ukraine war. Australian inflation, which rose by 0.4 per cent in August, would have decreased but for the increase in petrol prices that month. Commodity prices across the board, including LNG, wheat, soybeans, sugar, and cocoa, have also climbed due to the war and adverse weather conditions.
Weaker-than-expected job figures released last week showed unemployment climbing to a five-year high of 4.7 per cent in September, leading financial markets to reduce expectations of a further interest rate increase. However, the RBA and other central banks remain worried about inflation pressures driven by the war and the global AI construction boom. RBA governor Michele Bullock and senior researcher Anthony Brassil noted that a supply shock like the current surge in oil prices forces the bank to choose between supporting the economy or taking sterner action to control prices.
The RBA has already faced criticism for raising official interest rates to a 15-year high of 4.6 per cent, putting borrowers under extreme pressure. Despite higher rates, most borrowers remain ahead on their repayments, with many holding large balances in offset mortgage accounts. However, concerns persist that high inflation is disproportionately affecting low-income earners, who are struggling with rising rents and limited financial buffers. Central banks worldwide have lifted interest rates over the past three months as inflation has climbed, with global diesel prices remaining almost double their pre-war levels.