The Reserve Bank of Australia has warned that a global supply shock stemming from the war in Iran could push inflation and long‑term inflation expectations higher, especially while capacity pressures remain elevated. In a recent speech, Assistant Governor Chris Kent said such a shock “could both push short-run neutral rates higher and necessitate a more restrictive stance of policy.”
He cautioned that the longer the conflict persists, the larger the economic damage and the greater the risk of a broad repricing of assets. Kent noted that a negative supply shock simultaneously drives up prices and dampens economic activity, “making us all poorer,” and emphasized that central banks cannot directly offset this kind of shock. Their task, he said, is to ensure that the initial surge in prices does not become ingrained in longer-term inflation expectations.
The RBA will continue to balance these opposing forces—tighter financial conditions on one side and rising inflation risks on the other—as it sets policy to maintain price stability and full employment over the medium term.
