Sydney, March 26 - A senior central bank official said on Thursday that the longer the conflict in the Middle East endures, the greater the economic damage is likely to be, and he urged policymakers to prevent a surge in energy prices from unmooring inflation expectations.
In a speech delivered in Sydney, Reserve Bank of Australia Assistant Governor Christopher Kent noted that the Middle East conflict has tightened financial conditions and warned that the associated supply shock carries a clear risk to inflation.
Kent emphasized the limits of central bank tools in addressing the geopolitical shock but stressed their role in managing expectations. "Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures," he said.
The RBA this month raised its cash rate for a second consecutive meeting to 4.1%, after inflation remained uncomfortably high even before the Iran war disrupted global oil trade and pushed petrol prices in Australia to record highs. That tightening has reversed two of the three rate cuts implemented last year.
When asked whether policy could now be characterised as restrictive, Kent declined to give a definitive position. He pointed to recent shifts that have complicated that assessment, noting movements in both forward expectations for the cash rate and in model estimates of the neutral rate.
"That assessment became less clear with a combination of reductions in the cash rate target in 2025 and further increases in various model estimates of neutral," Kent said. He added that models aimed at capturing the short-run neutral rate have climbed by roughly 20 to 30 basis points over recent quarters.
Implications for growth and markets remain uncertain, the assistant governor said, because the interaction of elevated energy prices and tighter financial conditions could curb demand if the conflict persists. The immediate supply shock has already translated into higher petrol costs for consumers, and financial tightening has followed as markets price the economic consequences.
Kent's remarks underline the central bank's focus on preventing a temporary energy-led price surge from translating into broader and longer-lasting inflationary dynamics. They also highlight that evolving estimates of the neutral interest rate are complicating judgments about whether current monetary policy settings are restrictive.
Policymakers will thus be monitoring both the trajectory of the conflict and incoming economic data to judge how persistent the inflationary pressures are and how financial conditions are responding.