RBA Flags Inflation Threat from Global Oil Shock

Australia's underlying inflation remains too high, and further easing in domestic demand may be needed to bring price growth back to the Reserve Bank's 2%-3% target, Governor Michele Bullock said in a speech on Tuesday. She noted that it remains uncertain whether the three interest rate hikes so far this year will be sufficient, as their full impact has yet to flow through the economy. Bullock warned that underlying inflation could rise further as higher oil prices linked to the Iran conflict feed into broader costs, while noting the labor market also needs to cool further. "The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed," she said. Meanwhile, the recent surge in oil prices highlights the uncertainty from the Middle East war, with more businesses indicating they intend to pass higher costs on to consumers. Bullock added that growth is slowing as expected while the housing market weakened more than anticipated.

Australia’s consumer and business confidence has weakened following the recent oil price shock, though economic activity shows little sign of slowing, Reserve Bank of Australia Assistant Governor Sarah Hunter said in a speech on Wednesday. Addressing supply shocks, she cautioned that central banks cannot always “look through” such disruptions, warning that if inflation expectations rise, restoring stability may require “some period of low inflation and higher unemployment.” Hunter stressed that while supply shocks pose difficult trade-offs, they do not diminish the importance of maintaining low and stable inflation. She added the board “will continue to act as needed to ensure inflation returns to target and the labour market to sustainable full employment.” The RBA has raised its cash rate three times this year to 4.35% in response to the global energy shock triggered by the Iran war. Policymakers left rates unchanged in June but reiterated that further tightening remains possible.

The Reserve Bank of Australia’s June 15–16 meeting minutes underscored persistent concern that inflation remains well above the target of 2 to 3%, with underlying pressures expected to intensify in the June quarter. Policymakers noted widespread labor cost strains and weak sentiment among households and businesses, even as activity data pointed to a cooling economy. The board signaled further tightening remains possible after three rate hikes this year, arguing that restrictive policy and elevated oil prices could temper demand and aid rebalancing. Headline inflation eased to 4.0% in May from 4.2% as fuel costs fell, but core inflation accelerated, with the trimmed mean rising to 3.6% from 3.4% as firms passed on higher costs tied to Middle East tensions. While the board discussed prospects for easing regional strains, it cautioned that “global commodity supply constraints would take some time to resolve,” even if a lasting resolution emerges.