Senior Reserve Bank official Christopher Kent hints rate rises soon more likely to tackle soaring oil prices
Christopher Kent, the RBA’s assistant governor of financial markets, has suggested interest rates are more likely to rise again soon despite fears the oil crisis will cause an economic slowdown.
A senior Reserve Bank official says interest rates are more likely to rise even if soaring fuel prices slow Australia’s economy, leading a former Treasury economist to warn multiple hikes will spark the worst recession in 35 years.
Christopher Kent, the RBA’s assistant governor of financial markets, said tackling inflation should be prioritised over worrying about the effects of consumers having less to spend as a result of the US and Israel-led war on Iran making goods more expensive.
“The longer the conflict persists, the larger the economic impact will be, and the greater the risk of a material repricing of assets,” he told the KangaNews Debt Capital Market Summit in Sydney on Thursday.
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By continuing you agree to our Terms and Privacy Policy.“A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer.
“Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures.”
Yields on one-year Australian government bond yields rose from 4.57 per cent to 4.62 during Dr Kent’s speech, suggesting his more hawkish tone implied two more rate hikes were coming in 2026, that would take the RBA cash rate to a 15-year high of 4.6 per cent.
“The supply shock also poses a risk to inflation and longer-term inflation expectations at a time when there are ongoing capacity pressures in Australia and several other advanced economies,” Dr Kent said.
“This could both push short-run neutral rates higher and necessitate a more restrictive stance of policy.”
Former Treasury economist Warren Hogan said Dr Kent’s speech implied the RBA may have to hike the cash rate to 5.6 per cent - taking it to levels last seen in 2008 with six more increases - given Australia’s inflation was high before the Middle East war.
This would see the RBA cash rate potentially surpass the post-COVID policy rate levels above 5 per cent in the US, Canada and New Zealand.
“The short answer is there is every chance that we are going to have to take rates to at least the level of other countries which may well be their previous peaks of around 5 to 5.5 per cent,” he told The Nightly.
“There may be a risk that we have to go higher than those countries because of these misjudgements of the past two years, in which case it could well be that Australia suffers a far worse economic downturn than other countries because of it.”
Tighter monetary policy risks causing the first rate-rise induced recession since 1991.
“I think we’re going to have a recession anyway. It’s just whether or not we have an element of financial crisis mixed up with that recession,” Professor Hogan said.
Before the speech, the 30-day inter-bank futures market forecast May 5 rate hike to 4.35 per cent as a 57 per cent chance.
This would mark the third increase in 2026 that would undo the effects of last year’s three rate cuts and see the cash rate return to a post-COVID peak that had been reached in 2023.
Traders had been divided on the likelihood of a near-term increase given four out of the RBA’s nine-member monetary policy board last week voted against increasing rates by 25 basis points to 4.1 per cent.
Westpac is expecting inflation to hit 5.5 per cent by mid-year, putting the consumer price index even further above the RBA’s 2-3 per cent target.
Headline inflation in February eased to 3.7 per cent, down from an annual pace of 3.8 per cent in January, but the data pre-dated the US strikes on Iran that led to the blockading of the Strait of Hormuz where a fifth of the world’s crude oil transits.
But March inflation data was likely to be starting with a five given average fuel prices have soared by 30 per cent since the start of the conflict, AMP economist My Bui said.
“That’s purely from the fuel price impact - that already adds up one percentage point to the inflation number,” she told The Nightly.
“The issue right now for the Reserve Bank is that the consumers, everyone kind of has exposure to fuel prices and that actually pushes inflation expectations up, and the experiences for most central banks around the world is that when inflation expectation is up, it feeds back into actual inflation.”
But one more hike in May could be enough to alleviate inflationary pressure, BetaShares chief economist David Bassanese said.
“I think we get a May rate hike and then we’re done, that would unwind all the easing we had,” he told The Nightly.
“We’ll see house prices weaken and consumers pull in their horns as these rate increases bite, but obviously a lot on depends on how the war in Iran ends.”
Even before the crisis, businesses cited wages as the most pressing issue affecting their confidence, a NAB survey for the March quarter showed, which means higher inflation could potentially feed demand for more generous pay rises.
