RBA Assistant Governor Christopher Kent said a longer Middle East conflict would raise the economic cost and could lift energy prices. He said policymakers may need to limit inflation if price pressures persist. Speaking in Sydney, he said the war involving Iran has tightened financial conditions. He also said it raises the risk of an inflation spiral.

Rba Policy Focus

Kent said the RBA will keep assessing opposing forces affecting the economy. He said the Board will set monetary policy to deliver low, stable inflation and full employment. He said the longer the conflict lasts, the larger the economic impact. He said this could push short-run neutral rates higher and require more restrictive policy. He said policymakers must ensure an initial rise in prices does not feed into longer-term inflation expectations. He also said this implies a decline in short-run neutral rates in Australia and offshore. He said the Middle East conflict has caused some tightening in financial conditions. He said the supply shock also adds risks to inflation and inflation expectations.

Market And Trading Implications

We are assessing the countervailing forces on the economy from the conflict in the Middle East. The recent surge in Brent crude futures, which climbed over 15% in the last month to above $110 a barrel, directly threatens to ignite an inflation spiral. This puts the Reserve Bank in a difficult position as tighter financial conditions are already beginning to bite. The board has made it clear it will prioritize stable inflation, suggesting a more restrictive monetary policy is now on the table. We saw a similar dynamic back in 2025 when unexpected inflation prints forced the RBA to keep rates higher for longer than the market anticipated. Therefore, pricing in at least one more rate hike this year, or the removal of any priced-in cuts from futures contracts, seems prudent. This uncertainty is a clear signal for increased market volatility in the coming weeks. The longer the conflict persists, the larger the economic impact, creating a ripe environment for price swings in energy and currency markets. Traders should consider buying options to protect portfolios or speculate on this, as oil volatility indexes have already jumped to multi-month highs, reminiscent of the spikes seen in early 2025. The warning about needing to cap longer-term inflation expectations will directly impact the bond market. We should expect short-term bond yields, like the 2-year government yield which has already risen 30 basis points this month, to climb further as they price in a more hawkish RBA. This could lead to a further flattening of the yield curve, as long-term growth prospects dim while short-term policy tightens. For the Australian dollar, the situation presents two opposing paths, creating a challenging trading environment. Higher commodity prices and the prospect of a more hawkish RBA are typically supportive for the AUD. However, a significant “risk-off” move in global markets, driven by escalating conflict, would likely see funds flow to safe-haven currencies instead. Create your live VT Markets account and start trading now.

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