Reserve Bank governor Michele Bullock says Middle East conflict could worsen inflation

Reserve Bank governor Michele Bullock has suggested the Middle East conflict could worsen Australia’s inflation crisis and even spark another rate rise in two weeks’ time before higher oil prices cause an economic slowdown.

“The past few days have seen a significant escalation in conflict and instability in the Middle East, which is deeply concerning,” she told a business summit in Sydney on Tuesday.

“A supply shock could, for example, add to inflation pressures. And the potential implications for inflation expectations are something we are very alert to.”

Australia’s chief central banker also hinted her RBA monetary policy board could raise rates again on March 17 despite Australia’s big four banks not expecting a hike until May, following the release of March quarter inflation data.

“Yes, every meeting is live,” she said.

She had a message for those thinking the Reserve Bank was now only likely to wait three months between hikes, given inflation was high and the labour market was tight.

“I would dissuade them from thinking that. I’m not making a prediction about March but it will be a live meeting,” Ms Bullock said.

“The board will be actively looking at whether or not it needs to move more quickly so I would discourage people from thinking that we necessarily move only every quarter.”

In some parts of the country, Australians were already paying $2 a litre for unleaded petrol before US air strikes on Iran killed its Supreme Leader, Ayatollah Ali Khamenei and caused a double-digit surge in crude oil prices.

Economists equate every $US10 a barrel rise in crude oil prices to a 10¢-a-litre increase at the bowser and a sustained conflict, between Iran and the Gulf States aligned with the US and Israel, could see petrol prices climb higher than they did in 2022 following Russia’s invasion of Ukraine.

Should petrol prices hit $2.40 a litre, a motorist filling up a Toyota RAV4 or Mazda CX-5 would be paying $22 more to fill up their SUV.

Another 25 basis point rate rise would take the RBA cash rate to 4.1 per cent for the first time since May 2025, and see a borrower with an average, $736,000 mortgage shell out $110 more a month in repayments.

The Reserve Bank of Australia isn’t expecting inflation to even fall within its 2 to 3 per cent target until mid-2027, with the mid-point of that band regarded as a late 2028 prediction. The consumer price index remained elevated at 3.8 per cent in January.

“Inflation expectations have been anchored - if we see that they are not, then interest rates are going to have to respond,” Ms Bullock said.

“It’s uncertain whether financial market conditions are sufficiently restrictive to return inflation to the mid-point of the target in a reasonable time frame.

“We do have inflation which is already elevated. With a supply shock occurring in a situation where we already have high inflation, I think there is a risk that inflation expectations may start to move.”

But Ms Bullock also said prolonged conflict could also cause a global economic slowdown and bring about disinflation.

“Add to that the uncertainty of the events in the Middle East and the potential impact of that on the Australian economy and you’ll see that we have some difficult decisions to make,” she said.

“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.

“We’ve been doing conceptional thinking about what might happen if there is a prolonged increase in energy prices.”

Higher commodity prices, during a time of heightened oil prices, traditionally boosts Australia’s terms of trade, or the ratio of export and import prices.

“That might be positive for us in terms of income,” she said.

But Australia is also a net importer of oil which Ms Bullock said “obviously has big implications for inflation”.

“Particularly for headline inflation and what people see at the pump,” she said.

“The other possibility is if this is a very prolonged conflict, and there is a very, very elevated and lengthy rise in energy prices, this is ultimately going to feed through into economic activity and I think uncertainty — if people are paying more for their petrol, they’ve got less money to spend on other things.

“This might impact consumption. If businesses are uncertain, that might impact investments.”

An “elongated shock” could also make it harder for the RBA to overlook short-term, headline inflation factors.

“This one might be a little bit harder because we already have elevated inflation,” she said.

The RBA chief said her monetary policy board would prefer to preserve the gains in the labour market, despite unemployment being low at 4.1 per cent.

“We’re not putting too much emphasis on unemployment - we are trying to look at where the risks lie; at the moment, they lie, we think, more on the inflation side so we’re paying more attention to that,” she said.

Australian consumer confidence levels are now at the lowest point since December 2023, which had followed the RBA’s 13 rate rise in 2022 and 2023, based on an ANZ-Roy Morgan poll of 1033 people taken in late February and early March.

This was based on a four-week average score of 77.8 points, which was well below the 100-point level where optimists outnumber pessimists.

NAB senior economist Taylor Nugent said the RBA was still more likely to hike in May before remaining on hold until late 2027.

“But this will require the data to play out as we expect,” he said.