Iran conflict has ‘mixed’ implications for RBA interest rate decision: economists
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The news: The uncertainty caused by the US-Israel war on Iran could lead to a more cautious RBA, with economists saying the impact is likely to be “mixed” with higher petrol prices likely to increase prices but growth potentially to take a hit.
The context: Betashares chief economist David Bassanese said that implications from the Iran conflict on the RBA’s interest rate decisions would be “fairly mixed”.
Higher global energy prices would put pressure on inflation through fuel prices, which would be “a negative for consumer spending and sentiment”.
“On balance, however, heightened geopolitical tensions, if they persisted and escalated, would tend to make the RBA less likely to hike rates amid such uncertainty,” Bassanese said.
Even without a formal blockage of the Strait of Hormuz, a pivotal trade route for 20% of global oil supply that is near Iran, “oil-related transport transport costs are likely to rise, with shipping companies rerouting via alternate, more expensive routes and freight insurance costs likely to surge”.
AMP head of investment strategy and chief economist Shane Oliver similarly said that the main impact would be through higher petrol prices but the implications for the RBA “are ambiguous” due to the “boost to inflation but a hit to growth”.
As such, Oliver said AMP is maintaining its view that the RBA will keep “rates on hold with a high risk of another hike”.
However, Oliver also noted that “while higher oil prices flowing from the war could drag on Australian growth via weaker global growth, Australia is relatively well placed as we are a net energy exporter and may benefit from higher prices for gas and coal. And our economy is less dependent on oil”.
ANZ economists Sanjay Mathor and Krystal Tan more broadly suggested that “it is unlikely that [Asia’s] growth will come under pressure”.
They note that all other than Malaysia, all Asian economies outside of China are net oil importers, raising inflationary concerns due to higher oil prices, the ANZ economists suggest the pressures will be manageable.
A weaker US dollar could reduce import cost pressures while inflation sits “within or below central bank targets in all economies and domestic demand is also more measured”.
NAB economists said in a note that they don’t expect a “notable impact” on monetary policy immediately, even with the expected flow-on from higher energy prices putting inflation on close watch.
Instead, they said the “the right move for the RBA [is] to look through transitory supply shocks to headline inflation other than their impact on ongoing inflation expectations”.
“That said, inflation has been benefiting from declining petrol prices, and a stronger exchange rate over recent months has been helping reduce the risk of persistence across tradable inflation components,” they said.
“Higher fuel and shipping costs present another upside risk to inflation for the RBA in the near term given ongoing margin pressures in the business sector.”
The sources: ANZ research, Betashares note, ANZ research
