As conflict in the Middle East dominates global headlines, Australians are left wondering if the fallout will be felt at home.
"The answer is, it depends on how long it lasts," Saul Eslake, a Hobart-based economist, told Australian Broker. "And I have no idea how long it's going to last. I don't think anybody knows."
On Sunday, US time, or Monday in Australia, US President Donald Trump said he plans to sustain the US-Israeli airstrikes on Iran for several weeks, or longer, if necessary.
"Whatever the time is, it's okay; whatever it takes," Trump said in a public address. "Right from the beginning, we projected four to five weeks, but have the capability to go far longer than that."
On Monday in Australia, Social Services Minister Tanya Plibersek told morning show Sunrise on 7 that "of course there will be an economic impact.
"Our global oil and petrol ultimately is impacted by what is being produced in the Middle East," she said.
Eslake added that if the conflict does drag on, "the immediate impact is obviously higher petrol prices at the pump.
"If that's all that happens — and it doesn't happen for very long — although it will add to headline inflation, the Reserve Bank of Australia (RBA) will look through it," the economist said.
In other words, policy makers would be unlikely to respond with higher interest rates, because temporary price spikes rarely warrant a policy reaction. At the same time, sustained increases in fuel costs can act much like a rate rise: higher interest rates curb inflation by forcing mortgage holders to devote a greater percentage of their income to repayments, leaving less to spend elsewhere.
"In the same way, in the short-term, most people can't do anything about how much driving they do," Eslake said. "So if the price of petrol goes up and stays up, people spend more on petrol and have less money to spend on other things, which tends to slow the economy down. In which case you don't need to raise interest rates."
However, if the conflict persists and elevated fuel prices become entrenched, the risk shifts from a temporary spike to broader, underlying inflation, and potentially further interest rate hikes.
"It will mean higher prices for things that use petrol," Eslake explained. "Obviously, the cost of transporting goods from where they're made, or if they're imported, where they land in Australia to where we buy them. Retailers and wholesalers who will be charged more by their trucking companies will pass that on to consumers in the form of higher prices. And airlines are pretty quick to pass on increases in the cost of aviation fuel to passengers in the form of higher airfares.
"And if the Reserve Bank finds itself having to revise up its forecast of underlying inflation again, then they'll probably put interest rates up again," the economist added.
Earlier today, RBA Governor Michele Bullock spoke at the Australian Financial Review Business Summit in Sydney, commenting that higher oil and energy prices because of the conflict could intensify inflationary pressures in Australia.
"These events are a timely reminder that in this world of geopolitical uncertainty, things can change quickly," she said. "It is too early to say what the economic impact will be; events are moving rapidly and there are different ways this can play out.
"At the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation," Bullock added. "It is not obvious how this might play out."
Meanwhile, Australians nationwide continue to grapple with higher living costs as inflationary pressures keep mounting. The RBA responded in turn last month by raising the official cash rate (OCR) 25 basis points to 3.85% to help tame inflation. The move subsequently put more pressure on mortgage holders in an already hot-housing market.
Since then, there have been no signs of inflation slowing down. January's headline CPI print was 3.8%, the same as December, while trimmed mean inflation edged up to 3.4%, from 3.3% the month earlier. That's on top of increases in both headline CPI and trimmed mean inflation in December's print.
Major lenders and brokers alike were quick to flag that the central bank's stance on monetary policy was unlikely to be a one-off, with many anticipating another rate increase at the bank's May meeting.
