RBA Faces Oil Shock as Debt and Reform Delays Mount

Oil closed last week at US$106 a barrel, and senior Reserve Bank of Australia sources say they see no sign of prices heading lower. That’s a problem. The bank’s forecasts, due for an update next month, assumed prices as much as US$20 a barrel cheaper. The gap leaves the RBA weighing further interest-rate increases ahead of two critical meetings before Christmas.

The Inflation Problem

Inflation has stayed above the bank’s 2-3 per cent target for three of the past four years. The official cash rate sits at 4.6 per cent, a 15-year high. After weaker job figures, markets cut the perceived chance of a rise to 4.85 per cent at the November meeting from one in three to about one in five. Unemployment reached a five-year high of 4.7 per cent in September.

Pressure goes well beyond the petrol pump. Diesel has climbed back to around its level at the start of the Russia-Ukraine war, feeding into transport, manufacturing and food-production costs. Inflation rose 0.4 per cent in August; higher petrol prices prevented a fall. LNG sits near US$28 per unit, more than double its pre-war level. Wheat is up 37 per cent this year, soybeans 24 per cent, sugar 42 per cent, and cocoa beans have more than doubled. Government spending at state and federal levels also threatens to fuel inflation.

RBA governor Michele Bullock and senior researcher Anthony Brassil laid out the bind plainly. “High inflation makes budgeting and planning harder, increases uncertainty and distorts price signals,” they said, adding that it “tends to impose the most significant burdens on households with limited financial buffers.” Monetary policy, they conceded, “cannot eliminate the real economic loss caused by the shock. It can only influence how that loss is distributed over time.”

Home borrowers paid a record A$21 billion in interest in the three months to June. Yet mortgage payments as a share of disposable income were lower than in 2024, when the cash rate peaked at 4.35 per cent. Most borrowers remained ahead on repayments, and many held large offset balances. Low-income renters without mortgages fared worse, facing higher rents for three years.

Households Take Markets Into Their Own Hands

Australians are increasingly backing themselves. An ASX study of almost 4,500 people found 39 per cent of adults own shares, ETFs or other listed investments outside superannuation, among the highest rates in developed markets and ahead of the UK and Germany. About 2.8 million own ETFs, roughly double the 2020 figure, and the industry manages about A$388 billion.

Not everyone’s cheering. Jarden analyst Matthew Wilson argues index funds buy more of the biggest companies, including CBA and BHP, creating a loop. “The more you buy, the more they go up, so the more you buy,” he said. He questioned whether markets still do their job of price discovery and capital allocation, and said passive flows have stretched CBA’s fundamental valuation. Stockspot chief executive Chris Brycki disagrees. “The ‘dumb money’ has all been sucked up by ETFs and now only the sharks are left at the poker table,” he said.

The Debt Bill Comes Due

The Grattan Institute’s report, “Budget reboot: How to fund Australia’s future,” puts numbers on years of delay. State government debts have more than doubled since 2019. “Outside of the COVID pandemic, the last time Australian governments owed this much, the country was still paying off debt from a world war,” it said. Interest on state debt has doubled to 0.6 per cent of annual economic output and is likely to double again. Borrowing costs to fund deficits have risen roughly four-fold since immediately before COVID. The federal budget remains in structural deficit and could face costs if states approach fiscal crisis.

Grattan’s answer relies heavily on revenue: lifting the GST from 10 per cent to 15 per cent, taxing fresh food, and raising an extra A$76 billion a year. It also calls for spending discipline, particularly from the states, and an end to the 2018 GST deal with Western Australia, which would free A$6 billion. “Too often, politicians approach ‘budget repair’ as if it merely requires cutting a few wasteful public spending programs,” the authors wrote.

Political appetite looks thin. Anthony Albanese has rejected abandoning Western Australia’s GST arrangement, and the government faces resistance to removing a private health-insurance subsidy for older Australians. Treasurer Jim Chalmers conceded: “Power is much more effective right now in the distorting and blocking than the building or reforming.” Former treasurer Joe Hockey, whose 2014 austerity budget was largely rejected, was blunter. “There’s going to have to be a crisis now. There’s going to have to be a financial crisis,” he told The Business.

The human cost is already visible. An AMP report found more than half of adults under 30 have changed plans about having children because of cost-of-living pressures. Nearly two-thirds felt they needed to own property first, and saving a 20 per cent deposit takes most people more than a decade.

Workers, Employers and the Climate Pitch

A Curtin Centre for Applied Ethics survey of 2,048 working Australians found 97 per cent believe large companies carry at least some responsibility on climate. Only one in seven thought their employer was making good progress. Sixty per cent favoured a gradual transition away from mining and fossil fuels, with strong support for affected workers. Almost four in five saw greenwashing as at least somewhat common, and 85 per cent would trust claims if the law required disclosure with penalties for misleading ones. Report author Astghik Mavisakalyan said workers are looking to companies central to Western Australia’s economy as Australia prepares to preside over COP31 climate negotiations next month.

Why This Matters:

The RBA can’t print oil, and rate rises can’t fix a supply shock. They can only choose who bears the pain. With the cash rate at a 15-year high, unemployment at 4.7 per cent and inflation stubborn, there’s little room for error. Meanwhile, state debts have doubled since 2019, and borrowing costs are climbing faster than the revenue to service them. Governments that spend freely during a supply shock add to the very inflation the central bank is fighting. From a fiscal-responsibility view, the Grattan warning that tomorrow’s Australians will pay for today’s deficits deserves weight, even if its tax-heavy prescription is contested. Households, for their part, are already adapting by building their own wealth through markets.