RBA’s Kent: Middle East conflict poses inflation and economic risks

The Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent warned that if the Middle East conflict prolongs, the economic damage would be greater and policymakers would need to cap inflation amid surging energy prices.

In a speech in Sydney, he said that the Iran war tightens financial conditions but also increases the risks of an inflation spiral.

Key takeaways:

WE WILL CONTINUE TO ASSESS THE COUNTERVAILING FORCES OPERATING ON THE ECONOMY

BOARD WILL SET MONETARY POLICY TO ACHIEVE LOW, STABLE INFLATION AND FULL EMPLOYMENT

THE LONGER THE CONFLICT PERSISTS, THE LARGER THE ECONOMIC IMPACT WILL BE

THIS COULD PUSH SHORT-RUN NEUTRAL RATES HIGHER, NECESSITATE MORE RESTRICTIVE POLICY

NEED TO ENSURE INITIAL RISE IN PRICES DOES NOT LEAD TO RISE IN LONGER TERM INFLATIONARY EXPECTATIONS

THIS IMPLIES A DECLINE IN SHORT-RUN NEUTRAL RATES HERE AND OFFSHORE

MIDDLE EAST CONFLICT HAS LED TO SOME TIGHTENING IN FINANCIAL CONDITIONS

HOWEVER, THE SUPPLY SHOCK ALSO POSES RISK TO INFLATION, INFLATION EXPECTATIONS