Key facts
- Resurgent oil and fuel prices could lead to a fourth Australian interest rate rise this year.
- US missile strikes on Iran and a new maritime blockade have driven oil prices to monthly highs.
- Brent crude oil hit $85 per barrel, and West Texas Intermediate surpassed $80.
- Economists warn that continued conflict could push Brent oil prices to $100 within 10 days and $150 within 10 weeks.
- Wholesale diesel prices have risen, and the federal government's fuel excise relief is set to expire on August 2.
- Markets have increased bets on an RBA rate hike, with a 23% chance for August and over 50% by December.
- Renewed hostilities have damaged consumer confidence in the economy.
Resurgent oil and fuel prices, driven by renewed conflict between the US and Iran, could prompt a fourth interest rate rise by the Reserve Bank of Australia (RBA) this year, economists have warned. US missile strikes on Iran and President Donald Trump's announcement of a new maritime blockade have lifted oil prices to their highest point in a month. Brent crude oil hit $85 per barrel on Tuesday morning, while the West Texas Intermediate benchmark price for US crude surpassed $80 a barrel, up from near $70 in early July.
Vivek Dhar, energy commodities strategist at Commonwealth Bank, stated that escalating hostilities could deplete global oil stockpiles and push prices far above their April high. He projected that continued conflict could drive Brent oil prices to $100 a barrel within 10 days and $150 a barrel within 10 weeks. Crude prices at $110 per barrel in April had previously sent Australian unleaded petrol prices to nearly 260 cents a litre and diesel to nearly 320 cents a litre.
Rising oil prices in July had already pushed up wholesale diesel prices from 177.1 cents a litre early in the month to 186 cents a litre on Tuesday, according to the Australian Institute of Petroleum. Diesel prices at service stations have risen accordingly, back to about 190 cents a litre in the big capital cities, according to MotorMouth. Peter Khoury, the NRMA spokesperson, noted that markets had accounted for negotiation breakdowns, but fuel prices would increase if oil prices remained elevated for more than a week. Additionally, the federal government’s fuel excise relief is set to expire on August 2, which will push prices up by another 16 cents a litre.
Matthew Hassan, head of Westpac’s macro-forecasting, indicated that resurgent oil prices support the bank’s prediction that the RBA will raise interest rates in August. He suggested that this would feed into the RBA's unease about persistent inflation. Markets have increased their bets on an RBA rate hike since the strikes resumed, now anticipating a 23% chance of a hike in August and a greater than 50% chance by December. The RBA has already increased rates three times, bringing the current rate to 4.35%.
Renewed hostilities have also damaged households' confidence in the economy, according to the Westpac-Melbourne Institute tracker of consumer confidence. Hassan stated that in the absence of the conflict, a more substantial recovery in consumer confidence for the month would likely have been observed. The survey found that consumers had been growing less fearful of interest rate rises and more hopeful about their family finances improving in a year's time before the conflict intensified. However, most consumers remain pessimistic on average and still expect a further rate increase in the coming year.
My Bui, an AMP economist, commented that higher oil prices and the growing likelihood of a rate rise would drag consumer confidence back toward its April lows. Bui noted that the employment market has not yet deteriorated to concerning levels, and price pressures remain elevated, leading to a continued view of a higher chance of a hike from the RBA in the August meeting.