RBA's Michele Bullock is 'very alert' to inflation risk from Middle East war

Published Tue, Mar 3, 2026 · 06:42 AM

[SYDNEY] Australia’s interest rate-setting board is “very alert” to the potential implications for inflation expectations from the Middle East conflict and is “well positioned” for a policy response if required, Reserve Bank of Australia (RBA) governor Michele Bullock said on Tuesday (Mar 3).

In some of the first remarks by a central bank chief since the US and Israel began striking Iran on Saturday, Bullock said that the conflict is “a manifestation” of a ratcheting up of geopolitical uncertainty. She cautioned that it’s impossible to predict the economic outcomes with any degree of confidence so early in the military campaign.

“Instead, we must ensure we can position monetary policy to respond if needed,” Bullock told a business summit in Sydney. “With the cash rate currently at 3.85 per cent and the economy closer to balance than it was a few years ago, we believe we are well positioned for such a response if it were to be required.”

Iran’s Supreme Leader Ayatollah Ali Khamenei and a host of other senior government officials were killed in strikes ordered by US President Donald Trump. Tehran responded with a barrage of missiles against Israel and the wider Gulf region that broadened the conflict and sent oil prices higher and jolted global markets.

Israel’s Prime Minister Benjamin Netanyahu said that the military strikes are expected to intensify in the period ahead and Trump said the campaign could last “four or five weeks”. Bullock said that despite the uncertainties, the RBA’s staff will now assess what the conflict could mean for Australian inflation.

“A supply shock could, for example, add to inflation pressures. And the potential implications for inflation expectations are something we are very alert to,” Bullock said at the AFR event. “But at the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation. It is not obvious how this might play out.”

The governor’s comments come two weeks ahead of the RBA’s March policy decision, when the board is widely expected to keep the cash rate unchanged. The RBA last month became the first major developed-world authority to raise rates this year, seeking to cool stubborn inflation.

Data since that meeting has pointed to an economy running hot with tight labour market conditions and persistent price pressures. A private gauge released on Monday showed job advertisements rose to their highest level since October 2024, suggesting hiring activity has intensified this year.

The rebound signals the job market is likely to remain tight in the near term, reinforcing concerns that inflation could stay sticky without further policy tightening. Financial markets are pricing in a strong possibility of another rate increase in May that would take the cash rate to 4.1 per cent, with an even chance of a third move later in the year.

“At this juncture, we think a large part of the unexpected increase in inflation since the middle of last year was due to sector-specific demand and price pressures that we expect to ease in coming quarters,” Bullock said.

“Overall, we think underlying demand in the economy is further from its supply potential than we had assessed six months ago,” she continued. “A range of indicators tell us that labour market conditions are tight. And it is uncertain whether financial conditions are sufficiently restrictive to return inflation to the midpoint of the target in a reasonable timeframe.”

Before the March decision, policymakers will scrutinise fourth-quarter gross domestic product data due on Wednesday. The economy likely expanded 2.2 per cent from a year earlier, above its estimated potential rate, the pace consistent with stable inflation, reinforcing the RBA’s assessment that excess demand persists alongside capacity constraints. BLOOMBERG