'We still have no idea': RBA warns of harsh Iran war reality

The RBA has raised the cash rate by 25 basis points for the third time this year. (Supplied) Link copiedShareShare articleAustralia had an inflation problem before the Iran war, but it's turned sinister. Prior to the war, core inflation — which the Reserve Bank of Australia (RBA) focuses on in its interest rate decisions — was well above 3 per cent. But the RBA wants inflation to be at or around 2.5 per cent. Enter the Iran war, an effective closure of the Strait of Hormuz and a major oil price spike, and headline monthly inflation has surged to 4.6 per cent. "Higher fuel prices are adding to inflation, and there are indications that this is likely to have second-round effects on prices for goods and services more broadly," the RBA's Monetary Policy Board said in its post-decision statement yesterday. "It is tough, and we're staring down the barrel. It is a tough time," RBA governor Michele Bullock acknowledged later at a press conference. Michele Bullock has been steadfast in her warnings about the need to control inflation. (AAP: Lukas Coch) Australia has become hostage to the oil price spike and, as Bullock puts it, it means "we are all feeling poorer". The problem facing the nation is that there is no clear solution or end in sight to Australia's worsening inflation problem. The Middle East conflict, Ms Bullock said, had "complicated things immensely". The war, with its daily twists and turns, means the RBA will be largely flying blind on monetary policy until the Strait of Hormuz is opened for the safe passage of ships. "Certainly, when I stood here in March, I think the war was maybe a week or two old, and everyone was thinking it'll be over in a couple of weeks," Bullock said. "It isn't. We're still here, we still have no idea." There has been a material shift in the commentary around the March interest rates decision. Earlier this year, the RBA was concerned that demand in the economy was greater than supply. The backdrop to this was weak productivity, such that the economy's speed limit had lowered. In this environment, it's practically impossible to achieve higher levels of economic growth without speeding and pushing inflation higher. "Information since the February meeting suggests that some of the increase in inflation reflects greater capacity pressures," the March Monetary Policy Board statement read. Excess demand in the economy has led to an inflation problem. Now, the oil shock has exacerbated the inflation problem and, as a result, "we are all feeling poorer, that's what this war has done to us", Bullock said. Today's rates rise will result in another impost on household budgets. (ABC News: Sharon Gordon) Supply constraints, or the economy's ability to produce stuff, have led to higher inflation and tighter monetary policy — not indulgent mortgage borrowers spending big. Now, a war halfway across the world is adding to those cost pressures in the economy. Donald Trump's actions in the Middle East are impacting economies around the world. (Reuters: Kevin Lamarque) Supply constraints remain, and we now have bog-standard, cost-push inflation. Again, it has nothing to do with excess spending by households with mortgages. But, as we had heard ad nauseam, the RBA is trying to slow the economy to ease the part of the inflation problem it can control, and monetary policy is the only tool it has. "Inflation hurts all Australians," Bullock said. And it's plain to all that mortgage borrowers are shouldering the burden to tame inflation. The bad news is the worst may be yet to come. "The board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations," the Monetary Policy Board said in its recent statement. This is what the pundits call a "hawkish hold". It means the latest interest rate hike could easily be followed by one or two more increases. Although not necessarily next month, judging by this comment from the governor in her press conference: "One reason for deciding to increase interest rates, to give ourselves space now to sit and see what happens, whether the baseline turns out or it's an adverse scenario, that was part of the thinking." Our mortgage repayment calculator will show you how much your loan repayments may change. The reason more rate rises remain on the agenda is that the RBA is not just worried about the possible ongoing effective closure of the Strait of Hormuz. It's worried that, right now, shoppers are making the logical leap in their minds that prices are going to increase at a faster pace over the weeks and months ahead. In response, they are going to increase their spending now to avoid those higher prices. This brings demand forward and adds to inflationary pressures in the economy. The Monetary Policy Board noted this week that "short-term measures of inflation expectations" had already risen. It also said that a "longer or more sever

'We still have no idea': RBA warns of harsh Iran war reality

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'We still have no idea': RBA warns of harsh Iran war reality

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