The likelihood of a Reserve Bank of Australia interest rate hike has doubled over the past two weeks, according to ANZ, as the breakdown of the US-Iran ceasefire drives global oil prices higher and pushes up fuel costs for Australian motorists. Traders now place a nearly 30% chance of a rate increase at the RBA’s Aug. 12 meeting, up from 16% in early July.
The renewed conflict comes as the Australian economy already carries the weight of three rate increases this year and a cooling housing market, with economists saying the trajectory of the conflict will determine whether the RBA must raise borrowing costs again.
Brent crude, the international benchmark, has surged 23% over the past two weeks to trade near $90 a barrel. The jump follows the collapse of the fragile ceasefire between the US and Iran, with Iran’s leader declaring “full-scale war” and Houthi rebels threatening to blockade millions of barrels of Saudi Arabian oil passing through the Red Sea, according to reports cited by the Guardian.
The probability of a hike by November has doubled to 80% over the same period, ANZ said.
Luke Yeaman, the Commonwealth Bank of Australia’s chief economist, said the lack of trust between the warring parties made it difficult to judge the trajectory of the conflict, which he said would send a “fresh stagflationary pulse” through the Australian economy.
“In the current dynamic, we believe this will drag on for at least several weeks and possibly longer,” Yeaman said in comments reported by the Guardian.
Yeaman said he was sticking to his forecast for no more rate rises this year, at least for now, but that a prolonged closure of the Strait of Hormuz could change the calculus.
“If we see a prolonged closure of the strait and a big jump in oil prices, that will feed through to higher inflation, but it will also slow growth,” Yeaman said. “In the short term that could mean the case for one further rate hike is higher. But calls for multiple rate hikes are a little overblown.”
Australian motorists are already seeing higher costs at the pump. Diesel prices on the east coast jumped 40 cents in July to about $2.10 a litre, according to Motormouth. Unleaded petrol rose 25 cents to about $1.75 a litre, a move compounded by the expiry of some federal government fuel excise relief at the start of the month.
Yeaman forecast economic growth to slow to 1.5% by the end of 2026, down from 2.5% in 2025.
“Were you to see a serious escalation in the conflict and a prolonged closure of the strait [of Hormuz], then growth could slow much more sharply,” he said.
Yeaman warned that global oil prices could push as high as $150 a barrel if no negotiated solution is reached by late August or early September, conjuring the worst-case scenarios contemplated during the first phase of the conflict. He said he expected the government would step in to shield households by reinstating the full fuel excise discount if oil prices spiked again.
Daniel Hynes, a senior commodity strategist at ANZ, said the drop in oil prices during the ceasefire into the low $70s had not reflected the structural hit to global supply and the system’s “fragility,” and that $80 to $90 a barrel was a more realistic level.
“The $100-a-barrel mark would potentially be within sight if we are here in a few weeks’ time and things have gotten worse,” Hynes said.
Hynes said technical limits for how low oil inventories could fall without triggering a breakdown of infrastructure were already being breached in the US, which would push buyers there to look further afield for oil, increasing competition for scarce seaborne cargoes and driving up prices.
“At the moment there’s a feeling that if it [renewed conflict] doesn’t persist too much longer, they will be able to suffer through this period without too much damage,” Hynes said. “Obviously the risks rise day by day; the market is at a critical juncture.”