RBA now twice as likely to hike interest rate as US-Iran war drives fuel prices higher

Lead

The likelihood of a Reserve Bank interest rate hike has doubled according to market forecasts, as the escalating Middle East crisis drives fuel prices higher. Traders now place a nearly 30% chance of an interest rate rise on 12 August, up from 16% two weeks ago, as reported by The Guardian. The development comes as the international Brent crude benchmark surged by 23% over the past two weeks, nearing $US90 a barrel.

Coverage comparison

The Guardian, which provided the only coverage of this story, reports that Australian households face the prospect of both a rate hike and petrol prices above $2 a litre in the coming weeks. A second Guardian report notes that financial markets see a higher chance of a fourth cash rate increase at the RBA's next meeting, with one economist saying crude oil prices are likely to stay elevated for at least a year.

Both articles attribute the fuel price increases to the US-Iran conflict and the phasing down of the government's fuel tax relief. There is some variation in the reported diesel price increase for July: one report puts the jump at 40 cents to about $2.10 a litre, while another says diesel prices are up by about 50 cents to about $2.20 a litre in major East Coast cities.

Key claims

• Rate hike probability: Markets place a nearly 30% chance of an interest rate rise on 12 August, up from 16% two weeks ago, according to The Guardian.
• Oil price surge: The international Brent crude benchmark has surged by 23% over the past two weeks, as reported by The Guardian, with another report citing a 37% jump in the international benchmark.
• Fuel price increases: Diesel prices have jumped by 40 cents in July to about $2.10 a litre, according to Motormouth data cited by The Guardian, while another Guardian report says diesel is up about 50 cents to about $2.20 a litre. Unleaded petrol prices have risen to about $1.75–$1.80 a litre.
• Fuel tax relief: The removal of some fuel excise relief from the start of July has contributed to higher costs, with the government's fuel tax relief phasing down to 16 cents per litre.
• Global oil supply: Global oil stockpiles are depleted, and Houthi rebels have threatened to blockade Saudi Arabian oil through the Red Sea, as reported by The Guardian. Iran's leader has declared "full-scale war" with the United States.
• Economic warnings: Analysts warn that crude oil prices are likely to stay elevated for at least a year, with the US-Iran war entering a new and more dangerous phase, according to Warwick McKibbin, director of the ANU's Centre for Applied Macroeconomic Analysis.

Perspectives

The Guardian's reporting primarily reflects the viewpoints of economists and market analysts. Luke Yeaman, CBA's chief economist, is quoted as saying the conflict would send a fresh stagflationary pulse through the Australian economy. He said the lack of trust between the warring parties made it difficult to judge the trajectory of the conflict, which he believed would drag on for at least several weeks.

Warwick McKibbin of the ANU also expresses concern, noting that all oil reserves have been run down, particularly in the US, and describing the situation as "quite serious for the world to be in."

Johnathan McMenamin, a senior economist at Barrenjoey, adds that higher global prices and the end of the remaining fuel excise discount after 2 August would push unleaded petrol above $2 a litre in coming weeks, an "uncomfortable level for households."