Caution urged on rates
Bad news for borrowers
For Australians who have been smashed by skyrocketing interest rates — which have added thousands of dollars to their yearly mortgage repayments — a desperate wait for relief could be even further way.
Experts had predicted rates would be slashed in Australia in the second half of this year, but the latest escalation of hostilities in the Middle East poses new risks to global inflation, while the US also reported hotter inflation than expected in March.
Interest rates are currently at 4.35 per cent in Australia, soaring from 0.1 per cent in the space of 15 months.
Iran launched an attack on Israel unlike anything the world has seen with more than 300 munitions fired on Saturday – and surprisingly this could impact Australia’s interest rates.
Alongside the chilling humanitarian costs of the attack, the latest strike could also spell bad news for tackling global inflation, according to Betashares chief economist David Bassanese.
Iran is one of the world’s leading oil producers and any disruption to its capacity to supply global markets could see oil prices rise further, pushing up global inflation from still overly high levels — making it difficult for banks around the world to lower rates, he explained.
“Despite lingering trade sanctions, Iranian oil exports have lifted strongly over the past few years — especially to China — with the United States seemingly passively accepting this as a means to keep downward pressure on world oil prices and US inflation,” he said.
“But if hostilities with Israel escalate, the United States along with its allies, may come under renewed pressure to strengthen sanctions once again.
“In the case of Australia, petrol prices account for just under four per cent of the consumer price index directly. Higher oil prices would also have indirect inflation effects as it would raise costs for a range of businesses.
“A strong and sustained rebound in oil prices would not just further hurt real household incomes – weakening consumer spending further – but also raise inflation and make it difficult for the Reserve Bank to deliver interest rate cuts later this year.”
In the US rates are currently sitting at 5.37 per cent – the highest in 23 years – and now some economists have dropped their predictions of cuts by June. Instead experts are warning there will be no relief before Christmas after March inflation in the US accelerated from 3.2 per cent to 3.5 per cent.
Bendigo Bank chief economist, David Robertson, agreed others usually follow the Fed and said the Reserve Bank of Australia (RBA) is around six months behind most other central banks – which means rate cuts could be delayed until 2025.
Other factors that could rule out the RBA slashing rates include a slower fall in inflation and a rise in employment.