The International Monetary Fund’s scenario, in which global oil prices surge to $130 a barrel, could lift fuel prices in Australia by a further 30 cents a litre and increase pressure on the central bank to raise interest rates, economists say.
In its latest review of global economic outlooks, the IMF modelled the impact on global growth and inflation of a worsening Middle East crisis extending into the following year. The fund highlighted a ‘clear and present danger’ to the global economy from turbulence in commodity and bond markets. The institution, based in Washington, did not detail the impact on Australia of a hypothetical $30 rise in the price of crude oil, from its current level of more than $106 a barrel.
The IMF described a scenario in which ‘the conflict continues until the end of June 2027, keeping the straits of Hormuz and Bab el-Mandeb largely closed to commercial shipping, extending damage to regional oil infrastructure and delaying the recovery of oil supplies until the end of 2027’. The scenario also notes that ‘with limited room for further drawdowns, oil prices reach $130 from the fourth quarter of 2026 to the first quarter of 2027’.
Unleaded petrol prices in major cities on the east coast have recently surpassed $2.40 a litre and are approaching six-month highs. Diesel prices have fallen but remain high at around $2.80 a litre. Under the rule that every $10 rise in global oil prices leads to a 10-cent rise at the pump, a $30 increase could push unleaded petrol towards $2.70 and its highest level since the start of the war more than seven months ago.
Economists told Guardian Australia that such a move could leave inflation more than one percentage point above expectations by the end of the year, further straining household living costs and slowing growth. Jonathan Kearns, chief economist at Challenger, said the ‘reality’ is that the central bank, along with other central banks, will have to respond to higher fuel costs with higher interest rates. ‘The question is how much higher,’ Kearns said. The central bank implemented its fourth interest rate hike last month.
Minutes from that meeting, published on Tuesday, showed board members discussed how the ‘conflict in the Middle East has worsened and oil prices have been significantly above the level assumed in the August forecasts’. The minutes stated: ‘Generally, members noted that global cost pressures had clearly intensified. Part of this came from indirect effects of higher oil prices.’
Johnathan McMenamin, head of economic forecasting at Barrenjoey, said he expects inflation to rise to 4.2 per cent over the year by September, up from 4 per cent in August. McMenamin noted that every 10 per cent rise in fuel prices directly adds 0.33 percentage points to overall inflation. The central bank’s forecast for overall inflation to fall to 3.6 per cent by the end of the year is based on Brent crude oil falling to $81 a barrel. If global oil prices were instead to head towards $130 a barrel, according to the IMF scenario and assuming every $10 rise in oil price leads to a 10-cent rise in fuel prices, inflation could remain at 4.5 per cent by the end of 2026.
McMenamin was less convinced that the central bank would need to respond with higher interest rates, noting that the institution had primarily been responding to underlying price pressures linked to domestic capacity constraints, rather than external factors.
