Question marks surround Reserve Bank’s interest rate move

THE last time the US embarked on a Middle East military intervention, then-Secretary of Defense Donald Rumsfeld ruminated on the challenges of unknown unknowns.

Two decades later, as Donald Trump wages war in Iran rather than Iraq, unknown unknowns are complicating matters for the Reserve Bank of Australia.

Until a week ago, the central bank was widely expected to keep interest rates on hold at its March board meeting, which wraps on Tuesday.

But that changed with the conflict in the Middle East, which has blocked the passage of oil through the Strait of Hormuz, amid scenes of tankers ablaze in the Persian Gulf.

Analysts warn benchmark oil prices could soon exceed $US150 a barrel and cause inflation – already at 3.8 per cent – to fly further from the Reserve Bank’s two to three per cent target band. 

What happens to the price of oil is what Rumsfeld would have called an unknown unknown – as are the effects the February hike has had on Australian consumers and how long the Strait of Hormuz will remain closed.

The Reserve Bank can’t know to what extent these concerns will drive up inflation but as deputy governor Andrew Hauser revealed in a recent podcast interview, it is more worried about high inflation than growth, HSBC chief economist Paul Bloxham said.

“The market has taken this interview as guidance that a hike is more likely in March than not,” Bloxham said.

Trump’s unpredictability means forecasting is a mug’s game.

Treasurer Jim Chalmers said scenarios were being modelled where inflation peaks at mid to high fours, due to the US-led war on Iran.

“The source of the most extraordinary volatility in our forecast and in the economy … is really how long this (Iran war) drags out for,” he told Sky News on Sunday.

“We know already that it’s a very substantial shock.”

The situation could change entirely between the Reserve Bank board entering its lock-up on Monday morning and its cash rate announcement at 2.30pm on Tuesday.

AMP chief economist Shane Oliver said the Reserve Bank should leave the cash rate on hold at 3.85 per cent given the uncertainty.

“However, we now think the RBA will hike on Tuesday,” Oliver said.

The bank appeared concerned the war’s impact on oil prices would add to inflation expectations, making it even harder to bring price growth back down, he said.

The big four banks predict a rate rise and another in May, which would bring the cash rate back to 4.35 per cent – where it was before the Reserve Bank’s first rate cut in February 2025.

The central bank will release its biannual Financial Stability Review on Thursday while the Australian Bureau of Statistics will release jobs data.

Oliver expects the labour force survey to show a 25,000 rise in employment but a slight rise in unemployment to 4.2 per cent.

Like everyone else, Wall Street investors are mulling the impact of war in Iran on global oil supplies as erratic prices whipsaw ‌equities.

All three major US stock indexes logged declines on Friday and for the week.