Would it be wise for the RBA to ‘hold fire’ on a rate rise this month until it has a better understanding of how long the Iran war will go on and whether recent petrol price rises are temporary or not?
Last week, former Trump press secretary Anthony Scaramucci, who gave the US President the TACO tag (meaning Trump Always Chickens Out), gave some of our big super funds four possible courses for the Iran War.
Like Scaramucci, no one knows how long this war will drag on and what will happen to petrol prices, let alone economic growth, so I ask this question: Is the RBA dumb enough to raise interest rates tomorrow?
It comes as all of our top four banks think the RBA will raise rates this week, while the money market guess-merchants see a 65% chance of a rise.
Now, while all these people sound illustrious experts on the economy and the central bank, history shows their predictive powers are little better than newspaper tipsters for the weekend horse races.
And they’re going further to predict back-to-back rate increase, so that would mean a 0.25% rise this week and another in May! Why would they do that?
Well, the thinking looks like this: The Iran war has led to oil prices hitting US$100 a barrel. This has led to petrol prices jumping 50 cents a litre from $1.69 for unleaded petrol to $2.19 a litre on average.
This leads to what economists call cost-push inflation. If the RBA decides to raise rates on Tuesday, then that will be another cost-push factor that will force inflation higher.
While inflation is a critically important issue because we don’t know how long this war will last, along with the global economy, our economy could be looking at a recession. So, raising rates could prove to be a knee-jerk reaction.
Sure, raising rates serves to scare consumers to stop spending. And that helps reduce the inclination of businesses to raise prices for their customers. It also kills jobs. And that helps beat down inflation.
It should be added, however, petrol prices going up so much in such a short time is akin to a rate rise when it comes to consumer hip pockets.
Also, unlike rate rises that affect business and mortgage belt borrowers, petrol price increases affect a lot more Australians. In 2021, 85.7% of households owned at least one car and while 7% now own electric vehicles, the spike in power prices captures these consumers who use a lot of electricity.
Over the weekend, the US Energy Secretary Chris Wright said he expects the war with Iran to end within “the next few weeks.” If he’s right, then oil supplies would surge and petrol prices would fall.
Until this war spiked petrol prices, May was expected to be the next time the RBA might raise rates. It was only last month that it took the cash rate from 3.6% to 3.85%.
Given the uncertainty that this war has created and the fact that we face the dual threats of inflation and recession if this war drags on, waiting until May doesn’t look like a dumb move.
The AFR’s Michael Bleby says, “fear and anxiety are gripping the auction market.” He revealed that “Australia’s east-coast-dominated housing market is cooling, with more homes being offered for sale at the same time as prospective buyers grow cautious about the cost of living and rising interest rates.”
His research found the following: “As many as 2,871 homes were scheduled for auction in the week to Saturday, a 58 per cent increase on the previous week – which included a public holiday in Victoria, South Australia, the ACT and Tasmania – and a 16 per cent increase on the same week a year earlier, Cotality figures showed on Sunday.”
It looks like petrol prices rises and Iran war headlines predicting inflation, recession and stagflation seem to be doing the job for the RBA of scaring the pants of over-confident Aussies who’ve been accessories after the fact when it comes to fuelling inflation by continuing to spend and buy despite rising prices.
Call me an economist but I think it would be wise for the RBA to ‘hold fire’ on a rate rise this month until it has a better understanding of how long the Iran war will go on and whether recent petrol price rises are temporary or not.
