Rampant inflation, rates rising, recession: The cost of war continuing for months

Home borrowers could be slugged with another five interest rate hikes if the war against Iran is not quickly resolved, new economic analysis has revealed, as the full extent of the financial hit to consumers from spiralling petrol prices becomes apparent.

Modelling by Oxford Economics Australia, released on Thursday, shows an end to the war by May would push underlying inflation to 3.7 per cent by the middle of this year and remain elevated well into next year.

Oxford Economics Australia’s head of economic research, Harry Murphy Cruise, said that alone was likely to force the RBA, which meets on May 4-5, to take official interest rates to 4.35 per cent.

“The Reserve Bank has to do more to mitigate the inflation shock,” he said.

Murphy Cruise said if the Reserve lifted rates at its next meeting, it was likely to hold them steady for some time.

But if the war continues until September, which would push oil beyond $US150 a barrel, Australia and most of its key trading partners end up in recession.

The hardest-hit parts of Australia would be Western Australia, with its economy forecast to contract by 2.6 per cent, followed by the Northern Territory (down 2.5 per cent), South Australia (2.4 per cent) and Queensland (2.3 per cent).

All four are heavily dependent on diesel fuel for key parts of their economy.

Underlying inflation would approach 6 per cent, forcing the Reserve Bank to take the cash rate to 5.5 per cent. On a $600,000 mortgage, monthly repayments would lift by $500 from where they are today.

Prominent independent economist Saul Eslake, writing for this masthead on Thursday, warned that if the RBA lifts rates at next month’s meeting, on top of the huge increase in fuel prices caused by the war in Iran, it would hurt the national economy.

“Raising interest rates in response to the first-round impact of higher fuel prices on inflation would be doubling up – and increasing the risk of a recession,” he said.

Household spending data compiled by the Commonwealth Bank confirmed the spending hit created by the spike in oil prices.

Spending lifted by 2.9 per cent in March, it found, with expenditure on transport surging by 22.3 per cent.

The bank’s head of Australian economics, Belinda Allen, said spending is likely to fall through April.

Treasurer Jim Chalmers, in Washington for International Monetary Fund talks, said new figures showing unemployment steady at 4.3 per cent in March confirmed the economy had gone into the current crisis in a good position.

The nation’s job market withstood the early hit from the war in Iran, with unemployment steady through March at 4.3 per cent.

Figures from the Australian Bureau of Statistics released this morning showed that 52,500 full-time jobs were created last month, offset by a 34,700 fall in part-time positions.

The jobless rate would have increased but for a 0.1 percentage point drop in the participation rate that measures the number of people in work or looking for it.

Unemployment in NSW, the nation’s largest job market, increased by 0.2 percentage points to 4.3 per cent, while it lifted by 0.1 percentage points to 4.8 per cent in Victoria.

There was a sharp fall in Queensland, by 0.7 percentage points, to the nation’s lowest jobless rate of 3.7 per cent, while it lifted by a similar amount in the ACT where unemployment jumped to 4.2 per cent.

Chalmers said the figures confirmed the country had strong economic foundations.

“This is a dangerous time for the global economy, but these figures confirm we still have low unemployment and that’s a good thing,” he said.

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