The Reserve Bank has delivered a third straight interest rate hike to contain growing inflationary pressures linked to higher fuel prices, even as it warned the Iranian war would deliver a major blow to the economy.
The widely expected decision to lift the cash rate to 4.35%, from 4.1%, comes as the central bank revealed a gloomy new set of forecasts that showed intensifying cost of living pressures alongside weaker growth.
The fall-out from the Iran war will slash half a percentage point off economic growth in 2026 against the pre-conflict forecasts in February, as annual growth halves to 1.3% this year.
The stagflationary effect of the oil supply shock comes through a higher peak in inflation, as consumer price growth reaches 4.8% in the year to the June quarter, versus a pre-war estimate of 4.2%.
A week out from what the treasurer, Jim Chalmers, is simultaneously calling his most ambitious and responsible budget yet, the RBA’s decision will deliver a blow to the more than three million mortgaged households.
The RBA’s outlook suggested Australians would suffer another year of falling living standards, as prices rise faster than pay packets.
Under the RBA’s relatively optimistic “baseline” scenario that assumes a relatively rapid end to the Middle East conflict, the hit to growth will not translate into substantially higher unemployment in the near term, with the jobless rate expected to be at a relatively low 4.3% by the end of this year.
The RBA also explored two “adverse” scenarios involving a more extended conflict that leaves oil prices higher for longer.
Under the more extreme version, unemployment was forecast to push above 5% as the economy slows more sharply.
Even under this more pessimistic scenario, however, the nation escapes recession, according to the forecasts, although the RBA said it did not attempt to model what would happen were Australia to physically run short of fuel.
