Jim Chalmers says escalation of war threatens recovery

This week, the IMF used its six-monthly world economic outlook to note the growing risks caused by conflicts around the world.

“Intensification of regional conflicts, especially given the wider span of conflict in the Middle East, or the war in Ukraine, could further disrupt trade, leading to sustained increases in food, energy and other commodity prices,” it said.

“Commodity price volatility may result in higher inflation, especially for commodity-importing countries, and restrict central banks’ room to manoeuvre.”

The fund only expects Australia’s inflation rate to ease to 3.3 per cent next year. This is well above the forecast of the Reserve Bank, which has inflation at 2.8 per cent by June 2025.

Data out next week is expected to confirm inflation pressures easing over the past three months, in part due to the sharp fall in oil prices since the middle of the year. Some economists are tipping annual inflation to be within the Reserve Bank’s 2-3 per cent target band for the first time in three years.

Chalmers said an escalation of the war across the Middle East risked “persistent inflation” across the globe.

“Within a week of tensions re-escalating in October, oil prices spiked 10 per cent. And over the past year, demand for safehaven assets has seen the price of gold rise by around 48 per cent,” he said.

“A broader war could put upward pressure on oil prices, prolong the fight against inflation and threaten the soft landing that we all seek.”

But Liberal leader Peter Dutton said the government had to take responsibility for inflation, comparing interest rate settings in Australia to those in other countries.

“Interest rates are already started [sic] to come down in comparable economies around the world,” he told Sydney radio station 2GB.

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“The countries that we should be compared to – the United States, United Kingdom, Canada, New Zealand etc – are all coming back. Interest rates have dropped in all of those countries and they should have dropped here by now.”

Official interest rates have been cut to 4.75 per cent in New Zealand, which has been in recession for the past 15 months, while in Canada the cash rate is 3.75 per cent after a spike in the nation’s jobless rate to 6.5 per cent.

Dutton said government spending was increasing debt and putting at risk the nation’s official credit rating.

Last month, ratings agency S&P Global maintained Australia’s AAA credit rating while noting that the budget deficit and net debt would remain modest over the next two years.

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