Reserve Bank of Australia governor Philip Lowe has warned the rate of inflation could reach at least four per cent and an increase in the cash rate from its record low is plausible this year.
He told a business conference the risks on inflation have clearly moved to the upside as a result of rising oil and commodity prices caused by Russia’s invasion of Ukraine.
Global crude prices jumped to nearly $US130 a barrel after US President Joe Biden banned Russian oil and gas imports. That hike is set to push petrol prices in Australia to more than $2 a litre in coming weeks.
The floods along the nation’s east coast are also expected to result in higher prices for fruit and vegetables, with growing areas hit and supply chains disrupted.
“Headline inflation is going to be higher and will have a number with a ‘four’ in front some time this year,” Dr Lowe told the Australian Financial Review business conference on Wednesday.
However, Dr Lowe said it is still not known whether the increase in prices is only temporary, while pointing out that at 3.5 per cent annual inflation is less than half that in the United States.
The RBA has repeatedly said it wants to see inflation sustainably between its two to three per cent target before lifting the cash rate from a record low of 0.1 per cent.
Dr Lowe reiterated that to sustain higher rates of inflation you have got to have wage growth above three per cent.
Current wage growth at 2.3 per cent, as measured by the wage price index, is still only where it was prior to the pandemic.
“Given the outlook, though, it is plausible that the cash rate will be increased later this year,” Dr Lowe said.
Most Australians appear to be expecting the first official rate rise in more than a decade over the next year.
The latest Westpac-Melbourne Institute consumer sentiment survey found slightly more than two thirds of respondents are expecting a rate rise, the highest proportion since August 2011.
The proportion of consumers recalling news about inflation jumped to 38.7 per cent in March, a 14-year high, and up from just 8.6 per cent a year ago.
Westpac chief economist Bill Evans retains the view the first move will be in August after quarterly inflation reports on April 27 and July 27.
Consumer sentiment fell 4.2 per cent in March to 96.6, and below the 100-level which indicates pessimists outweigh optimists.
Mr Evans said this was the weakest result since September 2020, but came as no surprise.
“The war in Ukraine; the floods in southeast Queensland and northern NSW; ongoing concerns about inflation and higher interest rates were all likely to impact confidence,” he said.
The survey did not capture the flood disaster that is now impacting greater Sydney.
Patrick Coghlan, CEO at credit reporting agency CreditorWatch, said it could take up to 12 months to see the full impact of the floods, but expects it will have a dramatic adverse effect on trade activity.
CreditorWatch, in its latest business risk report, expects insolvencies to dip as support packages for flood-affected areas are delivered and banks offer loan payment holidays to affected businesses.
“However, over time, as rejected insurance claims, losses from uninsured businesses and loss of income begin to be felt, this will unfortunately see insolvencies rise in those regions as well as the rest of Australia,” it said.
Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)