Persistent conflict‑driven oil shocks are now firmly on the Reserve Bank of Australia’s radar as a potential trigger for further interest rate hikes.
Speaking at the Australian Conference of Economists in Canberra, Reserve Bank of Australia (RBA) chief economist and assistant governor (economic) Sarah Hunter made clear that the Monetary Policy Board (MPB) was prepared to hike the cash rate if impacts from the Middle East conflict filtered more broadly through supply chains.
Hunter began by saying that the RBA normally treated short‑lived supply disturbances, such as brief spikes in commodity or shipping costs, as noise that could be “looked through” provided inflation expectations remained anchored.
Yet she said that this approach eviscerated once a shock lasted longer or became more complicated, due to the fact that it shifts how households and businesses view the future path of prices.
“If the shock is expected to be more persistent, it is likely to have larger impacts and create greater risks of inflation expectations shifting,” Hunter said.
“And policy may come into play while the shock is still influencing inflation. In this world, it may not be right for monetary policy to ‘look through’.”
Hunter then linked that assessment to the interest‑rate outlook, saying that the board would respond if underlying pressures failed to fade.
“If some persistent inflationary pressure is expected, monetary policy may need to be tightened. But by how much depends on all the factors I have discussed so far and the trade‑offs they create,” she said.
Iran conflict, oil prices, and market expectations
Hunter’s comments come after a renewed escalation between Iran and the US.
US forces struck Iranian targets on Thursday in response to attacks on commercial vessels in the Strait of Hormuz and moved to revoke a licence that temporarily allowed Iranian oil exports, prompting Brent crude to surge.
US Central Command said that it would “impose heavy costs for targeting attacking commercial shipping”.
Markets had briefly taken a more relaxed view in June, when prospects of a ceasefire saw oil prices retreat towards pre‑war levels, prompting investors to price in a reduced risk of tightening in Australia by year end.
Trade‑off with employment and lessons from the pandemic
Hunter also drew on the experience of the post‑pandemic upswing, when unemployment briefly fell to around 3.5 per cent, and headline inflation climbed to 7.8 per cent.
She said that expansionary fiscal and monetary settings had amplified the impact of disrupted supply chains and that central banks ultimately had to respond with aggressive rate increases to contain the surge.
Discussing the role of expectations in that episode, Hunter said that restoring confidence in the inflation target could require a period of softer labour‑market conditions.
“We may need some period of low inflation and higher unemployment to bring expectations back down if they start drifting up,” she said.
Hunter also said that the earlier inflation spike had multiple drivers and was not solely the result of domestic policy.
She said the shock “was driven by global supply chain disruption after the pandemic” and that “much stronger‑than‑expected demand, including as a result of expansionary macro-economic policy” also contributed.
“As a result, central banks around the world had to respond with tighter policy,” she said.
National Australia Bank (NAB), the Commonwealth Bank of Australia (CBA), and Australia and New Zealand Banking Group (ANZ) all believe the cash rate has peaked at 4.35 per cent and are forecasting an extended hold period followed by cuts in early-to-mid 2027.
Westpac, meanwhile, has said that the RBA will hike the cash rate by 0.25 per cent at its August and September meetings, with Bendigo Bank also stating that it believes one final hike in 2026 seems likely.
[Related: Bendigo flags final 2026 hike as CBA eyes cuts]
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