In a Bloomberg TV interview, Reserve Bank of Australia Assistant Governor Sarah Hunter said the risk of inflation expectations drifting higher is elevated as the oil price shock linked to the Middle East conflict hits an economy where inflation was already persistent. She said short-term expectations have risen, which is not surprising given fuel price moves, but medium and long-term expectations are not yet showing anything too worrying. Preventing that short-term rise from feeding into longer-term expectations is a central policy concern because, if expectations became unanchored, bringing them back down could require a sharp economic slowdown. Hunter said the Bank is updating its oil assumptions continuously using market pricing and outside analysis, and that a longer period of elevated oil and other prices would worsen Australia’s inflation outcome. She said underlying inflation moderated through mid-2025 but then came in stronger than expected in the second half of 2025 as capacity constraints re-emerged and domestic demand picked up more than forecast. Productivity growth of about 0.7 per cent year on year over a two-year horizon also implies a lower pace of GDP growth that the Bank sees as sustainable without adding inflation pressure. The baseline forecast still has inflation returning to 2.5 per cent at the end of the forecast horizon, and neither that baseline nor the two alternative scenarios in the Statement on Monetary Policy implies a technical recession. Ahead of its August forecasts, the RBA is also assessing the federal budget and incoming state budgets as part of its view on aggregate demand and supply capacity.
Reserve Bank of Australia2026-05-19
Reserve Bank of Australia warns prolonged oil shock could unanchor inflation expectations and require sharp slowdown
Reserve Bank of Australia Assistant Governor Sarah Hunter said the risk of inflation expectations drifting higher has increased due to the oil price shock, with short‑term expectations rising but medium and long‑term expectations still contained. She noted underlying inflation eased through mid‑2025 before strengthening as capacity constraints and domestic demand picked up, while productivity growth of about 0.7 per cent year on year limits sustainable GDP growth. The baseline forecast still sees inflation at 2.5 per cent at the end of the horizon without recession, with the Bank updating oil assumptions and assessing budgets ahead of its August projections.