This could get ugly: Westpac warns war will light fire under inflation, dollar
Inflation would hit five per cent in Australia later this year, the dollar could climb to US80 cents by 2023 and home owners could expect two interest rate hikes by the end of the year, according to one of Australia’s biggest banks.
Westpac chief economy has tipped rates will tumble from September next year Photo: Westpac
The report from Westpac’s chief economist Bill Evans forecasts a continued surge in commodity prices leaving coal and base metals at extreme levels.
The report was backed up by gas industry leader Richard Cottee who said that “never in my wildest imaginations could I have envisaged the geopolitical upheaval” arising from the Russian invasion of Ukraine.
Cottee said the invasion’s impact on the gas sector could not be underestimated.
He said the result of the “Black Swan event” was illustrated by the fact that the ACCC was forecasting an LNG price of $29 a gigajoule for January, whereas it was in fact $41.24, a 50 per cent increase.
“This price increase clearly makes the threshold for economic gas projects lower … and will enable even relatively high cost projects to be economic, let alone projects which are low and mid-cost,” he said.
The Westpac report said the surge in oil prices was probably over, which would come as a relief to motorists who were paying above $2 a litre.
“We are assuming an oil price of $US100 a barrel through to the end of 2022,” Evans said, much less that the peak earlier this week of $US139.
“We have lifted our forecast peak in Australia’s headline inflation from 4.2 per cent to 5 per cent, capturing both the direct and indirect effects of the higher oil price profile.”
That rising inflation poses a problem for the Reserve Bank and its statements this week that it could afford to be patient when it came to rising interest rates.
Evans said Westpac retained its belief that rates would rise in August and again in October.
He said a “risk on” sentiment would prevail which would reward the Australian dollar but investors would be wary that the nation was vulnerable in any potential move by China to move to reclaim Taiwan.
He expected the Australian dollar to hit US76 cents later this year and if the risk-on sentiment continues it could reach US80 cents next year.
Australia’s currency is underpinned by commodity prices, particularly iron ore. While a higher dollar will hit exports it make imports and overseas travel cheaper.
