Reserve Bank assistant governor Sarah Hunter warns higher crude oil prices are inflation risk
Sarah Hunter, an assistant governor at the Reserve Bank, has issued a warning about higher crude oil prices.
A senior Reserve Bank official has warned higher crude oil prices could push up already-high inflation with financial markets increasingly expecting another interest rate hike.
Crude oil prices on Monday hit four-month high levels of $US102 a barrel, two days after drones were launched from Iraq on Saudia Arabia’s East-West pipeline by an unknown militia group, believed to be linked with Iran.
RBA assistant governor Sarah Hunter, in charge of economic forecasting, warned there would be implications for inflation, with the consumer price index well above the Reserve Bank’s 2-3 per cent target at 3.5 per cent.
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By continuing you agree to our Terms and Privacy Policy.“Clearly, prices have tracked up just recently. That is flowing into the local economy,” she told a Regional Australia Institute summit in Canberra on Monday.
“It’s certainly concerning in the context of what it costs, therefore your energy costs if you’re running a business, what it means for households in terms of the cost of petrol you’re putting in your car and therefore what it ultimately means for inflation which is what we’re tracking and targeting, so it’s pretty challenging.
“We do think that risks to inflation right now are skewed to the upside. One of those is the Middle East conflict.”
Dr Hunter said regional areas would be particularly vulnerable again like they were earlier this year, with diesel now selling for $2.70 a litre in parts of the NSW mid-north coast and central Queensland.
“The regions, if anything, are more exposed to this shock than people that live in the urban centres. It’s really tricky: we’ve obviously got now local prices for refined products — petrol, diesel — tracking up now, over the last few weeks,” she said.
“Conflict hasn’t reached a sustainable resolution. We are definitely concerned therefore about what that means for fuel prices and the flow of crude oil and refined products through the global economy.”
The 1200km Saudi pipeline connecting the Persian Gulf to the Red Sea has acted as an alternative to the Strait of Hormuz since March to transport crude oil and would be increasingly susceptible to more attacks, ANZ commodity strategists Daniel Hynes and Soni Kumari said.
“At this stage, we expect the pipeline to be offline only temporarily. Similar outages have been rectified within a week or two,” they said.
“Nevertheless, the attack suggests that regional energy infrastructure is now a direct target of Iran and its nearby militant proxy groups.
“This raises the risk of supply disruptions hanging over the entire Persian Gulf.”
The Federal Government could be facing pressure to revive fuel excise relief that was in place from April to August should crude oil prices stay at elevated levels.
Elevated crude oil prices are far from the only inflationary threat, with the AI boom also making electronics more expensive.
“Anyone who’s bought a new iPhone recently might have noticed that the price went up quite a bit — that’s actually true for consumer electronics more generally and that’s directly related to the AI boom — the chips that are in all of our electronic products are in high demand right now,” Dr Hunter said.
While the labour market is slowing, there’s still tightness in regional areas, meaning workers outside capital cities are in a better position to bargain for higher wages.
“The availability of labour in the regions is more challenging than it is in the cities,” Dr Hunter said.
“That tells me something about the regions and economic performance and the fact that you’re constrained more by that lack of labour.”
The 30-day interbank futures market is now rating a hike as a 76 per cent chance, with another increase to take the RBA cash rate to a 15-year high of 4.6 per cent and add more than $100 to monthly repayments on an average, new home loan of $731,000.
The RBA’s next interest rate decision on September 29 is being made a day before the Australian Bureau of Statistics releases inflation data for August.
While NAB is expecting a rate hike later this month, the Commonwealth, ANZ and Westpac are forecasting an increase on November 3 just before the Melbourne Cup, following the release of inflation figures for the September quarter.
