Central bank governor flags uncertainty over interest rate path
Australia’s central bank has warned that the inflation impact of the US–Israeli strikes on Iran remains unclear, as policymakers assess how any oil price shock could feed through to the domestic economy and the future direction of interest rates.
Reserve Bank of Australia (RBA) governor Michele Bullock told an audience in Sydney that the bank was monitoring the situation in the Middle East closely but needed more time and data before drawing firm conclusions about the effect on prices.
“It’s too early to say what the impact will be,” Bullock said. “Events are moving rapidly and there are different ways this can play out. A supply shock could, for example, add to inflation pressures. And the potential implications for inflation expectations are something we are very alert to.
“But at the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation. It is not obvious how this might play out.”
Crude benchmarks jumped as much as 13% on Monday after the escalation in Iran, a major oil exporter, raised fears of wider supply disruption across the Middle East.
Because oil is a key input across transport, manufacturing and household spending, sustained price rises could reinforce global inflation at a time when it remains above the RBA’s 2–3% target band. Higher fuel and freight costs can also flow into lenders’ funding expenses and, in time, mortgage pricing.
“We estimate if Brent crude remained at US$80 a barrel for the remainder of Q1 26, fuel would add around 0.1 percentage points to our Q1 headline inflation forecast,” said Belinda Allen, head of Australian economics at Commonwealth Bank.
Meanwhile, Bullock (pictured right) acknowledged that the central bank had erred in judging the balance of supply and demand in the Australian economy when it moved to cut interest rates, believing that conditions would normalise in 2025.
The RBA underestimated the strength of private demand in the second half of 2025 and overestimated the economy’s capacity to absorb that demand without generating inflationary pressure, she said.
Subsequent data since the RBA raised the cash rate again in February had, however, supported the decision, Bullock added, pointing to ongoing tightness in labour market indicators and lingering questions over whether financial conditions were sufficiently restrictive to return inflation to target within a reasonable period.
“We think a large part of the unexpected increase in inflation since the middle of last year was due to sector-specific demand and price pressures that we expect to ease in coming quarters,” the central bank governor said. “But economy-wide capacity pressures in the economy are also playing a role and, overall, we think underlying demand in the economy is further from its supply potential than we had assessed six months ago.”
Bullock also highlighted how difficult it is to forecast the economy using models alone, especially in an era of repeated external shocks.
She cited events such as the COVID-19 pandemic and geopolitical tensions as examples of developments that standard models struggle to capture in real time, reinforcing the need for the central bank to cross-check its analysis with information from households and businesses.
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