RBA Warns Iran Conflict Could Add to Inflation Pressures

Policymakers in Australia remained concerned about persistently high inflation, which had already been running well above target before the Middle East conflict began, minutes from the Reserve Bank's May meeting showed. The war’s impact on fuel costs further clouded the outlook, lifting headline inflation in March and likely again in the June quarter. Staff projected underlying inflation above 3% until late 2027, returning to the midpoint only by mid-2028. Board members weighed a 25bp hike against holding steady. Arguments for tightening stressed strong capacity pressures, and that financial conditions were “not sufficiently restrictive”. Concerns also centered on inflation expectations becoming “de-anchored” if elevated prices persisted. The case for pausing pointed to risks that conditions were already tight and that prolonged conflict could sap growth and labor demand. Most members judged inflation risks had risen, concluding the 4.1% cash rate might not be enough to contain them.

The Reserve Bank of Australia is increasingly wary that surging energy costs could quickly spill into broader consumer prices amid persistent capacity constraints and domestic cost pressures, assistant governor Sarah Hunter said in a speech on Tuesday. She added that these risks underpinned the central bank’s third rate hike this year to 4.35%, fully reversing 2025’s easing. Hunter added that the recent jump in oil prices was “particularly challenging,” warning that higher crude would inevitably lift business costs and consumer prices, with pass-through “faster and more extensive,” risking inflation expectations drifting higher. Hunter cautioned that the Iran war could prolong elevated oil prices and trigger wider supply disruptions, adding to inflationary pressures. Still, she noted inflation could ease if households cut spending and businesses scale back investment more sharply than expected.

The Reserve Bank of Australia raised its cash rate by 25bps to 4.35% at its May 2026 meeting, in line with expectations. This marks the third straight hike this year and, in an 8–1 vote, fully unwinds last year’s easing cycle. The decision reflects a material pickup in inflation in H2 2025, which continues to feed into price pressures in 2026. The Bank noted that the earlier rise was driven by stronger capacity constraints in the economy, while higher fuel and commodity prices linked to the Middle East conflict added to inflationary pressure. Updated forecasts show inflation peaking higher than expected before easing as demand slows and capacity pressures fade. The outlook remains uncertain, with risks skewed to the upside if geopolitical tensions persist and lift energy prices, feeding broader inflation. The Board judged inflation likely to remain above target, warranting the increase, and reiterated a data-dependent approach.