RBA's Bullock Is 'Very Alert' to Inflation Risk From Mideast War

Reserve Bank of Australia Governor Michele Bullock has said the central bank is closely monitoring the inflation risks arising from the escalating conflict in the Middle East. Bullock made the remarks during a business summit in Sydney, noting that the war is a significant source of geopolitical uncertainty.

She emphasized that the RBA remains "very alert" to the potential for a supply shock to push inflation higher. A rise in oil prices could result in higher petrol costs, which could in turn add 0.8 percentage points to headline inflation.

Bullock added that the RBA is well positioned to respond if needed, with the cash rate currently set at 3.85%. The RBA is expected to maintain this rate at its next policy meeting in March.

Why Is the RBA Concerned About the Mideast Conflict?

The RBA is watching closely how the conflict might affect global energy markets and, by extension, inflation in Australia. A prolonged war could send oil prices higher, increasing the cost of living and reducing economic activity. This dual risk—between inflationary and deflationary forces is a major policy challenge.

Bullock highlighted that a sharp rise in energy costs could have a direct impact on inflation. However, if the conflict leads to broader economic weakness, it could also push inflation lower. This makes it difficult to predict the net outcome for inflation.

The RBA is also monitoring the labor market, which remains tight despite recent rate hikes. With job advertisements at their highest level since October 2024, the central bank is concerned about the persistence of inflationary pressures.

How Are Markets Reacting to the RBA's Comments?

Financial markets are pricing in the likelihood of another rate increase in May, with the cash rate potentially reaching 4.1%. There is also a significant probability of a third rate hike later in the year.

Investor sentiment is shifting in response to the RBA's cautious stance. The tight labor market and continued inflation pressures are leading many to expect further monetary tightening.

The RBA will also be watching upcoming GDP data, which is expected to show economic growth above its potential rate. This would reinforce the need for continued policy tightening.

What Are Analysts Watching Next?

Analysts are focused on the RBA's upcoming policy decision in March and the data that will inform it. The central bank will have access to fourth-quarter GDP figures and other key indicators ahead of its meeting.

Bullock has acknowledged that the RBA's ability to return inflation to its target range remains uncertain. Tight labor market conditions and weak financial conditions suggest that more policy action may be needed.

The RBA's next move will be closely watched by global investors and central banks as a test of how developed economies are managing inflation in the face of geopolitical risk.