Inflation Anxiety Spikes: Central Bank Strikes First in "Super Week"

The Reserve Bank of Australia (RBA) raised interest rates by 25 basis points for the second time in two months, noting that the Middle East conflict has impacted the bank’s inflation expectations, taking the lead during “Super Central Bank Week.”

According to the monetary policy statement released on Tuesday (March 17), five members voted to raise Australia’s cash rate target by 25 basis points to 4.10%, while four members believed it should remain unchanged at 3.85%.

“Higher interest rates largely reflect expectations about the future monetary policy path, which have increased in Australia and most developed economies, due to market expectations that the Middle East conflict will bring inflationary pressures.”

The bank believes that the Middle East conflict presents “significant dual risks”: if the conflict persists longer or becomes more severe, it will push up energy prices and temporarily increase inflation; however, long-term uncertainty could dampen economic growth in Australia and its major trading partners.

Australian Reserve Bank Governor Michele Bullock said she understands Australians won’t welcome rate hikes, as they are struggling with rising fuel prices, but “if inflation becomes embedded in the economy, things will get worse.”

Bullock stated, “We don’t want a recession, but if we can’t bring inflation down, we have to face that reality.”

HSBC Australia Chief Economist Paul Bloxham said the RBA might have to argue that controlling inflation requires the country to go through an economic downturn, “The RBA is in a very tricky position right now.”

Following the RBA decision, this week will also see rate decisions from the Bank of Canada, Federal Reserve, Bank of Japan, Swiss National Bank, Riksbank, Bank of England, and European Central Bank.

Industry insiders say that faced with inflation threats from the Middle East conflict, many central banks may be forced to delay rate cuts. Currently, markets generally expect the US, Japan, UK, and Eurozone central banks to hold steady.

Deloitte Chief Economist Pradeep Philip noted that although the RBA has responded to the Middle East conflict, this rate hike more reflects the “severe domestic supply-side conditions in Australia.”

Macroeconomist Tom Orlik said, “Central banks can set interest rates, but they can’t reopen the Strait of Hormuz.”

Orlik expects Fed Chair Powell, ECB President Lagarde, Bank of England Governor Bailey, and other central bank leaders to send cautious signals, hoping the Middle East war will end soon before it causes another inflation problem they cannot solve.