In a recent speech, RBA Assistant Governor Sarah Hunter shed light on a critical issue: the impact of rising oil prices on Australia's economy. The speech, delivered at the Bloomberg Forum for Investment Managers, highlighted the unique challenges faced by the Reserve Bank of Australia (RBA) in navigating the current energy crisis.
The Oil Shock and Its Impact
The Middle East conflict, described as a clear external shock, has sent oil prices soaring. With Brent crude trading above $110 a barrel, the RBA is facing a difficult task. Higher energy costs mean higher costs for businesses and consumers, and this is a reality that Hunter acknowledges as an inevitable outcome.
What makes this situation particularly fascinating is the timing. The economy is already under capacity pressure, and domestic cost pressures are elevated. This means the inflationary impact of rising oil prices is amplified, creating a perfect storm for the RBA.
A Shift in RBA's Assessment
The RBA's response to this crisis has been decisive. They have raised interest rates for a third consecutive time this year, bringing the cash rate to 4.35%. This move fully reverses the policy easing implemented in 2025.
The key takeaway from Hunter's speech is the RBA's shift in assessment. They are no longer treating the energy shock as a temporary disturbance. Instead, they are acknowledging the potential for a faster and more extensive pass-through of oil price rises into domestic consumer prices.
Evidence from the Business Sector
The business sector is already feeling the pinch. Some firms have implemented fuel surcharges, and construction companies are reviewing their pricing on new contracts. This is a clear signal that the inflationary impact is being felt across industries, especially in sectors like construction, which are heavily reliant on energy costs and exposed to materials inflation.
The RBA's Forecasts and Risks
The RBA's forecasts assume a resolution to the Gulf conflict in the near term. However, as Hunter points out, a prolonged closure of the Strait of Hormuz or a broader disruption in supply could significantly add to inflation. This is a real risk that the RBA is monitoring closely.
A Double-Edged Sword
While a downside scenario, where households cut consumption and businesses scale back investment, could result in lower inflation, it's not a comforting prospect. This scenario implies stagflationary conditions, leaving the RBA in a tricky position. They would have limited room to ease policy even if growth deteriorates.
Implications for Markets
Hunter's explicit warning about the faster and more extensive pass-through of oil price rises has significant market implications. It suggests the RBA is not taking a wait-and-see approach but is actively considering further rate hikes. With the cash rate already at 4.35%, markets will be watching closely to see if a fourth consecutive hike is on the horizon, especially if Brent crude remains above $110 and the Strait of Hormuz stays closed.
Final Thoughts
The RBA's challenge is to balance the need to control inflation with the potential impact on growth. The construction sector's price reviews are an early indicator of the inflationary pressures the RBA is facing, and they will be closely monitoring services and non-tradeable inflation alongside the direct energy channel. This crisis highlights the delicate dance central banks must perform in responding to external shocks, and the RBA's next moves will be closely scrutinized by markets and economists alike.
