Global uncertainty stemming from Russia’s invasion of Ukraine is behind the Reserve Bank’s decision to keep the official cash rate at just 0.1 per cent, where it has been for the past seventeen months.
The RBA said it was not comfortable raising the rate even though the global economy was recovering steadily from the pandemic.
The conflict is causing share markets around the world to crash. More than $74 billion was wiped from the Australian Securities Exchange (ASX) in one day last week after news of the invasion broke.
Volatile share prices are set to have a big impact on retirement savings.
The Age reports that most workers have their retirement savings in fund options that have about half of their money invested in Australian and overseas shares.
“If global share prices were to dip 10 per cent, many super fund balances would fall by about half of that amount,” the report says.
But previous experience, as with COVID, suggests it’s better to stay calm and ride out the storm.
Atlas Funds Management chief investment officer Hugh Dive told the Sydney Morning Herald he believed the market drop was being driven by fear rather than logic.
“We’ve just gone through reporting season, earnings have been better than expected, but it’s fear and emotion rather than financials and earnings that are driving what’s going on today,” he said.
“The stock market is full of human emotions.”
Mr Dive says the fall mirrors the one that happened in March 2020, when news of the coronavirus first broke around the world. After falling 9.7 per cent, the ASX bounced back in April 2020 before going on to recover most of its value.
The situation in Ukraine has caused petrol prices to rise sharply, as Russian energy supplies are cut off from the world. That, in turn, is driving up the price of everyday goods and services.
Global oil prices topped US$100 per barrel last week for the first time since 2014 and Commonwealth Bank commodity strategists expect Brent crude oil prices to continue to climb to an average of $US110 a barrel.
The national average price for unleaded petrol was 180.6 cents a litre last week and is now nearing $2 a litre in many areas. That will drive higher transportation costs and push up prices of goods and services, including food on supermarket shelves.
The price of some agricultural commodities will jump further as Russia and Ukraine account for about 20 per cent of global corn exports and 25 per cent of wheat exports.
“The global economy is continuing to recover from the pandemic,” says RBA governor Philip Lowe.
“However, the war in Ukraine is a major new source of uncertainty. Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand.
“The prices of many commodities have increased further due to the war in Ukraine. Bond yields have risen over the past month and expectations of future policy interest rates have increased.”
Some economists are warning the worsening military situation could have disastrous knock-on effects for the world economy, causing consumer confidence to drop the world over.
“The Ukrainian crisis provides substantial geo-political uncertainty,” says Harley Dale, chief economist at CreditorWatch.
“Damaging economic and humanitarian consequences have yet to play out and discussion of petrol prices here in Australia hitting $2 a litre won’t be lost on consumers.
“Consumer confidence has already been trending down for nearly 12 months and supply chain issues associated with the crisis are likely to lead to a higher demand in groceries, sparked interest rates and steeper mortgage repayments.”
It remains to be seen how long Russia’s campaign in Ukraine will last, and how deep the impact on the world economy will be.
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