RBA Warns of ‘Restrictive’ Shift: Why Rising Neutral Rates and Petrol Shocks Could Trigger More Hikes

RBA Assistant Governor Christopher Kent warned today that the prolonged Middle East conflict is pushing Australia’s “neutral” interest rate higher, signaling a potentially more aggressive path for the cash rate. Despite global uncertainty usually cooling markets, Kent noted that persistent supply shocks in energy are forcing a “tighter stance of monetary policy” to prevent long-term inflation expectations from spiraling.

The Middle East “Wealth Tax”

In a sobering assessment of the ongoing regional conflict, Kent highlighted that the surge in oil and natural gas prices is effectively making Australians “all poorer.” He noted that while the RBA cannot change the supply of oil, it must react to the “material repricing of assets” caused by the war.

“A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer. Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations,” he said.

The Neutral Rate Reassessment

The core of Kent’s message was a warning to those expecting rate cuts. He explained that the conflict in the Middle East creates two countervailing forces, but the risk to inflation expectations is currently winning the tug-of-war.

“This could both push short-run neutral rates higher and necessitate a more restrictive stance of policy. Indeed, financial market participants have revised up their expectations of monetary policy rates in Australia,” he said.

Ensuring “Stable Inflation”

Kent concluded by reaffirming the Board’s commitment to its medium-term targets, even if the “supply shock” makes the path more difficult. He emphasized that the RBA will not allow temporary price spikes to become a permanent fixture of the Australian economy.

Full speech of RBA’s Kent here.