FEBRUARY 25 2022 – 3:00PM

Saul Eslake expects more petrol, super pain if war worsens

Sean Ford

Share prices and superannuation balances will fall further and oil prices rise again if the Russia-Ukraine conflict worsens, economist Saul Eslake expects.

“The most obvious consequences seem to have started already,” Mr Eslake said on Friday.

“That is, oil prices up and sharemarkets down – and hence super balances also down since super balances are heavily weighted towards equities – and if the situation deteriorates further, as I suspect it will, then we’ll get more of the same.”

Higher oil prices did not necessarily mean extra pressure to increase interest rates for home loan borrowers, as Mr Eslake saw it.

He said the higher headline inflation they would cause would not necessarily lead to earlier or larger hikes in interest rates by the Reserve Bank and central banks in other countries.

“That’s because higher oil and hence petrol prices have a very similar impact on aggregate household cash flows to higher interest rates,” he said.

” … they force households to spend more on petrol (or on servicing their mortgages) and hence, all else being equal, they have less to spend on other things, hence slowing overall demand and reducing upward pressure on other prices.

“When I was at ANZ, we used to have a rule of thumb that 10c per litre on petrol prices had a similar impact on aggregate household cash flows to a 0.25 percentage point change in interest rates.

“I say aggregate because, of course, the impact on particular households will differ according to whether they have a mortgage and how big it is, and whether they have a car and how much they drive.”

He said price increases were possible for a range of items of which Russia or Ukraine were major producers, either due to sanctions on Russia or destruction of Ukraine’s production capacity.

Examples included aluminium, nickel and wheat.

“If the conflict broadens beyond Russia-Ukraine – or if, as one interpretation of some of his rhetoric might imply, Putin uses nukes – then it’s possible, perhaps, that there could be a much larger fall in consumer and business confidence …,” Mr Eslake said.

 

This story More super, petrol pain tipped if Russia-Ukraine war worsens first appeared on The Advocate.