Public belief that low and stable inflation can be maintained in Australia is crucial to the Reserve Bank’s credibility, assistant governor Sarah Hunter has warned.
Households are just days away from key economic data that captures the impact of the Middle East conflict on domestic inflation.
Consumers have already seen their fuel bill skyrocket as the global oil supply shock flows through to the bowser, and next week's official data – capturing the month of March – will likely confirm what economists are projecting; that rising inflation will force the RBA's hand to lift the cash rate again.
RBA assistant governor, Sarah Hunter. Picture: NewsWire/Martin Ollman
Speaking at an International Monetary Fund event in Washington DC, the bank’s economic research head said Australia risks 1970s and 1980s-style ‘stagflation’ conditions the longer the Iran War continues.
In response, Ms Hunter said the bank’s ‘north star’ had to be ensuring both households and businesses have confidence that price growth will remain stable over the medium-term.
The combination of high inflation and weak economic growth, known as stagflation, hit Australia hard in the 1970s on the back of similar supply shocks to what the economy is experiencing currently
Oil crises in the 1970s, also relating to unrest in the Middle East, saw inflation jump to 17.7% in 1975, while a similar surge saw 12% inflation hit Aussie homes in 1982.
The Strait of Hormuz in the Persian Gulf is largely closed, disrupting global oil supply. Picture: Getty
While the Australian Bureau of Statistics (ABS) is yet to publish the first set of data that shows how this latest war has impacted inflation, market expectations anticipate a peak as high as 5% by the middle of the year.
“If we’re in this world where we get repeated supply shocks then ‘shock’ is perhaps not quite the right word because it’s has somehow a sense of it being a surprise but also relatively rare and unusual,” Ms Hunter said.
“If they’re becoming normal, if we’re having to deal with them more and more.
“I think we can’t necessarily look through them, we have to just start dealing with them.”
Consumer Price Index movement
| Month | Headline CPI | Trimmed mean |
| Feb 2026 | 3.7% | 3.3% |
| Jan 2026 | 3.8% | 3.3% |
| Dec 2026 | 3.8% | 3.3% |
| Dec 2025 | 3.4% | 3.2% |
Ms Hunter said shocks to the economy disrupting supply chains, impacting wages and mortgage repayments, spending habits and consumer behaviour make the RBA’s dual mandate of maintaining stable inflation and suitable employment levels “really, really hard”.
“For me, it’s all about what that does to the monetary policy trade-off,” she questioned. “How much of an impact on inflation does it have, and inflation expectations, and how much of an impact on activity?
“Inflation expectations have to be the north star in all of this – the credibility of the institution.”
How long the war and offshooting conflicts in the Middle East last will have a dire impact on how long Australia’s economic issues will last.
It is “really, really hard” for the Reserve Bank to manage its multiple priorities. Picture: Getty
“We have to be worried about not only the headline impact, the immediate impact of say an increase in fuel prices, but also pass through into our supply chains and what other indirect second effects we might see,” Ms Hunter said.
“If you start from a tight economy, if you’re already at full employment or maybe even beyond it, the potential for the second-round effects I think is probably larger.”
Beyond inflation, Ms Hunter warned that income shock for Aussies feeling the cost of living pinch is likely to result in decision-making that will have negative effects in the longer term.
“Many households in Australia and in all countries will be struggling with, and grappling with, higher fuel prices," she said.
"They will be making some really hard trade-offs, and that could well, in many countries, slow growth down and put pressure on our unemployment rates, and feed through into our labour market more broadly.
“We do have to balance these two things but, at the end of the day, that credibility is absolutely vital and we’ve got to keep that front of mind.”
Ms Hunter’s comments come after RBA deputy governor Andrew Hauser also spoke in Washington DC last week, pushing for better government support.
Mr Hauser told the Institute of International Finance Global Outlook Forum that monetary policy “can’t solve everything”, adding the bank needed the Australians to understand its limitations.
RBA deputy governor Andrew Hauser has said consumers expect too much from monetary policy. Picture: Supplied
The Reserve Bank’s monetary policy board will meet in two weeks’ time, with new inflation data next week expected to provide the first insight into how the economy is faring since the United States and Israel began coordinated attacks on Iran at the end of February.
All four of Australia’s big banks are expecting a rate rise on 5 May, while the Australian Stock Exchange shows markets were pricing in a 72% chance of a hike as of 20 April.
A third consecutive rise next month will return interest rates to 4.35%, a level last seen in November 2024.
This article first appeared on Mortgage Choice and has been republished with permission.
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