Australian mortgage holders could be facing a major interest rate hike earlier than expected due to Russia’s invasion of Ukraine, Australia’s central bank has warned.
Speaking at a recent business summit hosted by The Australian Financial Review, Reserve Bank of Australia (RBA) Governor Philip Lowe issued the warning that supply-chain issues sparked by the eastern European war could trigger a wave of inflation.
Lowe said “the war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing prices up, especially for commodities,” and that “this new supply shock will extend the period of inflation being above central banks’ targets,” news.com.au reported.
Lowe is particularly concerned that Australians’ attitudes will shift, making it inevitable to counter inflation with an interest rate hike.
RBA has kept the official cash rate (OCR) at a record low of 0.1% since November 2020 in response to the COVID-19 pandemic, but market watchers predict it will rise by 1% by the end of this year and hit 1.25% in 2023.
The 1% increase may sound small, but could add hundreds, or even thousands, of dollars extra every month for the average Australian mortgage, the report said.
Lowe held that a shifting mindset among Australians is “critical” to RBA’s decision, as it could damage the economy and potentially force his hand.
Central banks may find it difficult to keep rein on inflation if people start believing that the price rises are there to stay.
“This runs the risk that the low-inflation psychology that has characterised many advanced economies over the past two decades starts to shift,” Lowe said at the business conference. “If so, the higher inflation would be more persistent and broad-based, and require a larger monetary policy response.”
The Commonwealth Bank predicted last month that the interest rate would rise by as early as June this year – and that was before Russia began its invasion of Ukraine.
RBA said then that it would be at least another six months before they increased rates and that they would need to see two more quarterly inflation reports first.
Lowe made no such promise during the Wednesday conference, however, saying the bank “doesn’t have a plan that’s locked in.”
Lowe also mentioned the possibility that the higher prices could blow over and everything could go back to relative normality, news.com.au reported.
“We can afford to look through a period of temporarily high inflation because of higher oil prices and commodity price shocks if we think that they will eventually wash through,” Lowe said.
So far this year, oil and thermal coal prices have jumped by a massive 40%, while wheat has risen by the same amount in the space of just a month.
“For the countries in Europe, this rise in commodity prices represents a negative shock to their terms of trade and thus to their national income,” Lowe said. “This alone will cause a slowdown in economic activity.”
Australia, however, could potentially benefit from the increased prices, as it exports some of the affected commodities, news.com.au reported.
