Senior Reserve Bank official Christopher Kent hints rates rise soon more likely to tackle soaring oil prices

A senior Reserve Bank official has suggested interest rates are more likely to rise even if soaring fuel prices slow Australia’s economy, leading a former Treasury economist to warn this will spark a severe recession. Christopher Kent, the RBA’s assistant governor of financial markets, said tackling inflation should be a more important priority than worrying about the effects of consumers having less to spend as a result of the US and Israel-led war on Iran making goods more expensive. “The longer the conflict persists, the larger the economic impact will be, and the greater the risk of a material repricing of assets,” he told the KangaNews Debt Capital Market Summit in Sydney on Thursday. “A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer. “Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures.” Yields on one-year Australian government bond yields rose from 4.57 per cent to 4.62 during Dr Kent’s speech, suggesting his more hawkish tone implied two more rate hikes were coming in 2026, that would take the RBA cash rate to a 15-year high of 4.6 per cent. “The supply shock also poses a risk to inflation and longer-term inflation expectations at a time when there are ongoing capacity pressures in Australia and several other advanced economies,” Dr Kent said. “This could both push short-run neutral rates higher and necessitate a more restrictive stance of policy.” Former Treasury economist Warren Hogan said Dr Kent’s speech implied the RBA may have to hike the cash rate to 5.6 per cent - taking it to levels last seen in 2008 with six more increases - given Australia’s inflation was high before the Middle East crisis. “The short answer is there is every chance that we are going to have to take rates to at least the level of other countries which may well be their previous peaks of around 5 to 5.5 per cent,” he told The Nightly. “There may be a risk that we have to go higher than those countries because of these misjudgements of the past two years, in which case it could well be that Australia suffers a far worse economic downturn than other countries because of it. “I think we’re going to have a recession anyway. It’s just whether or not we have an element of financial crisis mixed up with that recession.” Before the speech, the 30-day interbank futures market saw a May 5 rate hike to 4.35 per cent as a 57 per cent chance, with traders divided on the likelihood of a near-term increase given four out of the RBA’s nine-member monetary policy board last week voted against increasing rates by 25 basis points to 4.1 per cent. Westpac is expecting inflation to hit 5.5 per cent by mid-year, putting the consumer price index even further above the RBA’s 2-3 per cent target. Headline inflation in February eased to 3.7 per cent, down from an annual pace of 3.8 per cent in January, but the data pre-dated the US strikes on Iran that led to the blockading of the Strait of Hormuz where a fifth of the world’s crude oil transits.