The Reserve Bank of Australia warned this month that inflation expectations could become unanchored due to an oil-price shock linked to the Iran war.
This instability threatens the central bank's ability to maintain price stability, potentially forcing prolonged high interest rates for Australian consumers and businesses. If expectations shift, the RBA may struggle to bring inflation back within its target range.
Reserve Bank of Australia Assistant Governor Sarah Hunter said the bank is increasingly concerned that inflation expectations could become unanchored because of the recent oil-price shock linked to the Iran war [1]. The volatility in energy markets is creating a ripple effect across the broader economy.
An RBA spokesperson said inflation will remain sticky as the conflict in the Middle East has unleashed higher fuel and commodity prices [2]. This trend follows a period where inflation picked up materially in the second half of 2025 [4].
To combat these pressures, the RBA lifted interest rates for a third time in 2026 [1]. While some reports indicate a benchmark cash rate of 3.85% [2], the bank has focused on aggressive hikes this year to stabilize the economy.
External price pressures continue to complicate the domestic outlook. Although the RBA Governor previously said that underlying inflation was expected to slow gradually [5], the current geopolitical climate has shifted the immediate priority toward vigilance against external shocks [5].
The bank is monitoring how these commodity price spikes translate into long-term consumer price indices. The RBA remains focused on preventing a cycle where expected inflation leads to actual price increases.
“"We are increasingly concerned that inflation expectations could become unanchored because of the recent oil‑price shock linked to the Iran war."”
The RBA's warning signals a shift from managing domestic demand to defending against global supply-side shocks. When inflation expectations become 'unanchored,' businesses and consumers begin to bake future price increases into their current behavior, creating a self-fulfilling loop of rising costs. By hiking rates for the third time this year, the RBA is attempting to signal its commitment to price stability, even as the Iran conflict pushes energy costs higher.
