Sinking Australian dollar may raise petrol prices, fueling inflation and delaying Reserve Bank interest rate relief.

A declining Australian dollar may result in increased petrol prices and heightened domestic inflation, delaying potential interest rate relief from the Reserve Bank.

After a 9 per cent fall in 2024, the Australian dollar trades at approximately US62¢, influenced by a significant drop in the Chinese yuan.

The Australian currency often reflects China’s economic performance.

NRMA spokesman Peter Khoury indicated that further decline in the Australian dollar could lead to increased local petrol costs due to diminished purchasing power against the US dollar. Over the past month, benchmark Brent crude prices have surged nearly 10 per cent, driven by declining US oil stockpiles and a general positive sentiment in markets, despite stagnation in China’s economy.

Khoury noted that petrol prices in key capital cities remain high following the Christmas and New Year holidays and have not yet normalised. In Sydney, prices are decreasing very slowly, averaging less than half a cent per day for regular unleaded fuel, compared to the typical reduction of one cent per day.

Matthew Sherwood, head of investment strategy at Perpetual, mentioned that rising petrol prices could contribute to headline inflation. However, the central bank typically focuses on core inflation, which mitigates the effects of volatile food and energy prices.

He also highlighted that a weaker Australian dollar could drive inflation higher, raising concerns for the Reserve Bank.