RBA Could Hike Rates if Middle East Conflict Drags On

A senior RBA official has warned that persistent oil supply disruptions could trigger a cash rate rise — what borrowers need to know now.

The Reserve Bank of Australia has issued its clearest warning yet that the cash rate could rise again — this time, the trigger is not domestic inflation data but the escalating conflict in the Middle East and what it could mean for global oil supplies.

Speaking at the Australian Conference of Economists in Canberra, RBA chief economist and assistant governor (economic) Sarah Hunter said the central bank's Monetary Policy Board was prepared to hike the cash rate if inflationary pressures from the Middle East failed to fade. As The Adviser reports, the remarks represent a significant shift in the RBA's public posture.

What the RBA Actually Said

Hunter's speech centred on a distinction the RBA normally makes but is now questioning: the difference between a supply shock it can safely look past and one it cannot.

The bank's usual approach is to "look through" short-lived disruptions — a brief spike in fuel prices or shipping costs, for example — provided that households and businesses still expect inflation to return to target over time. That tolerance breaks down, Hunter explained, when a shock proves more lasting.

"If the shock is expected to be more persistent, it is likely to have larger impacts and create greater risks of inflation expectations shifting," she said. "And policy may come into play while the shock is still influencing inflation. In this world, it may not be right for monetary policy to 'look through'."

Her conclusion was direct: "If some persistent inflationary pressure is expected, monetary policy may need to be tightened."

The trigger for these remarks is a fresh escalation between the United States and Iran. US forces struck Iranian targets in response to attacks on commercial vessels in the Strait of Hormuz, and the US also moved to revoke a licence that had temporarily allowed Iranian oil exports. The result was a sharp surge in Brent crude prices. Any sustained lift in oil prices flows directly into petrol, transport costs, and ultimately food prices — all of which feed into the inflation measures the RBA watches most closely.

Markets had taken a more relaxed view in June, when prospects of a ceasefire saw oil prices retreat towards pre-war levels and investors priced in a reduced chance of further tightening by year end. Those bets are now being reconsidered.

The Banks Are Divided on What Comes Next

Australian borrowers are being confronted with a genuine split in expert opinion about where rates are heading.

National Australia Bank, the Commonwealth Bank of Australia, and Australia and New Zealand Banking Group all hold the view that the cash rate has peaked at 4.35 per cent. Their forecasts point to an extended hold period, followed by rate cuts in early-to-mid 2027.

Westpac is in a different camp entirely. It has publicly forecast a 0.25 percentage point rise at the August meeting and another 0.25 percentage point rise at September's meeting. If Westpac's call proves right, the cash rate would reach 4.85 per cent — a level that would add hundreds of dollars per month to repayments on larger mortgages.

Bendigo Bank has also stated publicly that it believes one final rate hike in 2026 remains likely.

For borrowers on variable rate home loans, this split matters more than usual. If the majority hold view (NAB, CBA, ANZ) proves correct, staying variable begins to look more attractive as cuts potentially arrive in 2027. If Westpac's more hawkish call lands, those on variable rates could face two further increases before any relief.

The Pandemic Parallel

Hunter's speech drew a direct and deliberate comparison to the post-pandemic inflation episode that many Australian borrowers remember clearly. During that period, unemployment briefly fell to around 3.5 per cent while headline inflation climbed to 7.8 per cent. Central banks, including the RBA, eventually had to raise rates sharply and quickly to bring prices back under control.

"We may need some period of low inflation and higher unemployment to bring expectations back down if they start drifting up," Hunter said — flagging what may be required if an oil shock feeds into a broader inflation resurgence.

The lesson Hunter drew was pointed: when supply disruptions arrive alongside strong demand — as happened post-pandemic — the combined effect can push inflation far above what central banks can comfortably tolerate. The rate rises that followed were painful for mortgage holders. Policy is now trying to head off a repeat before it develops.

What Borrowers Should Be Doing Right Now

Two key data releases will shape the August 10–11 board meeting. The June quarter Consumer Price Index is due on July 29, and the monthly household spending indicator arrives on August 4. Both will be closely watched by the RBA and by lenders pricing their products.

Regardless of which bank economists prove correct, the uncertainty itself is worth acting on. If you are on a variable rate and haven't reviewed your loan recently, using the refinance savings calculator can show you how much the current rate gap is actually costing you. Several lenders are now offering variable rates below 5.9%, with the most competitive products at 5.69% — well below where many existing borrowers are sitting.

If you're weighing whether to fix, the decision is harder than usual. Some lenders are cutting fixed rates aggressively, signalling they expect the RBA to ultimately move lower. But if the Middle East situation escalates further and the RBA does hike, fixed rates could shift quickly in the other direction. Reviewing your refinance options with a clear picture of your risk tolerance — rather than waiting to see how events unfold — is the right approach.

Sitting still and hoping the situation resolves itself is not a plan. The next few months are shaping up to be the most consequential period for Australian mortgage rates in some time, and the decisions borrowers make now will determine their exposure to whatever comes next.