Reserve Bank of Australia warns supply shocks from Iran war could force tighter monetary policy

Australia’s central bank is sounding the alarm on a problem no interest rate hike can fix. Chris Kent, Assistant Governor of the Reserve Bank of Australia, warned that the ongoing conflict in Iran, and the resulting disruption to energy supplies through the Strait of Hormuz, could push inflation meaningfully higher and force central banks into an uncomfortable corner.

The message is straightforward but grim: supply shocks are coming, they’ll raise prices, and monetary policy has limited tools to deal with them directly. The best central banks can do, Kent argued, is keep long-term inflation expectations anchored, even if that means tightening into economic weakness.

The numbers tell the story

The Iran conflict has knocked roughly 10 million barrels per day off global oil supply, a figure large enough to reshape energy markets worldwide.

The World Bank projected a 24% surge in energy prices for 2026. That would mark the steepest annual increase since the 2022 Ukraine invasion sent commodity markets into a frenzy.

The RBA has already responded. The central bank raised its cash rate to 4.1% in March 2026, with Australian inflation running at 3.7% year-on-year through February. There are fears that figure could hit 5% by mid-year as petrol prices continue climbing.

Kent was careful to note the fundamental tension. Central banks can’t conjure oil out of the ground or reopen shipping lanes. A negative supply shock, by definition, means higher prices and lower economic output simultaneously.

What to watch from here

The RBA’s 4.1% cash rate is already restrictive by Australian standards. If inflation does hit 5% by mid-year as feared, the central bank faces a decision that will echo across asset classes globally. Further hikes would tighten financial conditions at a time when the economy is already dealing with a supply-side headwind. Holding steady would risk letting inflation expectations drift higher, which Kent explicitly flagged as the bigger danger.

For global markets, the Strait of Hormuz situation is the variable that matters most. Roughly 20% of the world’s oil supply typically transits through that chokepoint. Any escalation or prolonged disruption keeps upward pressure on energy costs, which feeds into everything from transportation to food prices to manufacturing inputs.

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