In a speech, Reserve Bank of Australia Assistant Governor (Economic) Sarah Hunter said the conflict in the Middle East is expected to lift Australian inflation in the near term through higher oil and gas prices, with the effect amplified by already tight domestic capacity. She said the Bank’s May forecasts now see headline inflation peaking at 4.8 per cent in the June quarter and underlying inflation running higher over the next year, helping explain the Monetary Policy Board’s recent decision to raise the cash rate to 4.35 per cent. Petrol prices rose 36 per cent at their peak and diesel prices remain well above pre-conflict levels. Fuel accounts for about 3.5 per cent of the Consumer Price Index basket and roughly 2 to 2.5 per cent of the cost of producing and distributing other CPI items, leaving travel, transport, postal services, some groceries and new dwelling construction more exposed. The Bank assumes relatively quick pass-through because the economy is somewhat capacity constrained and liaison already points to higher fuel surcharges and planned retail price increases. On its baseline, the oil shock adds about 0.4 percentage points to underlying inflation in the March quarter 2027, before inflation returns to the middle of the 2–3 per cent target band by early 2028 as the conflict is resolved soon, oil prices partly fall, capacity pressures ease and higher interest rates rebalance demand and supply. Hunter also highlighted two-sided risks. Inflation could be higher if oil prices stay elevated, supply disruptions broaden, pass-through is stronger or inflation expectations rise, but it could be lower if households and businesses cut spending and investment more sharply or if labour supply increases. The Board will remain attentive to incoming data and changes in the outlook.
Reserve Bank of Australia2026-05-19
Reserve Bank of Australia links Middle East conflict to 4.8 per cent inflation peak and recent cash rate rise to 4.35 per cent
Reserve Bank of Australia Assistant Governor (Economic) Sarah Hunter said the Middle East conflict is expected to lift Australian inflation via higher oil and gas prices, contributing to the Board’s decision to raise the cash rate to 4.35 per cent. The Bank now forecasts headline inflation to peak at 4.8 per cent in the June quarter, with the oil shock adding about 0.4 percentage points to underlying inflation in the March quarter 2027, before inflation returns to the middle of the 2–3 per cent target band by early 2028. She said the Board will remain attentive to incoming data and changes in the outlook.