The Reserve Bank of Australia is twice as likely to raise interest rates by November as geopolitical tensions in the Middle East push crude oil toward $90 a barrel, financial markets now indicate.
Oil traders have sent Brent crude up 23% in two weeks following the collapse of a fragile US-Iran ceasefire. The spike is already hitting Australian motorists hard, with diesel jumping 40 cents to about $2.10 a litre on the east coast and unleaded petrol climbing 25 cents to roughly $1.75, partly due to the federal government's partial removal of fuel excise relief.
Market pricing shows a 30% chance of an RBA rate hike on August 12, up from 16% two weeks ago. More significantly, the odds of a rise by November have climbed to 80%, double the prior probability, according to ANZ figures.
Luke Yeaman, chief economist at Commonwealth Bank, warned that the conflict would introduce a fresh stagflationary shock to an already slowing Australian economy. The combination of higher fuel costs and global instability threatens to drag growth further down even as inflation remains uncomfortably elevated.
"In the current dynamic, we believe this will drag on for at least several weeks and possibly longer," Yeaman said, though he stopped short of predicting additional rate rises this year at this stage.
The stakes are rising fast. Iran's leadership declared "full-scale war" with the US, while Houthi rebels threatened to blockade millions of barrels of Saudi Arabian oil flowing through the Red Sea. Analysts warn that global oil inventories are already depleted, leaving little buffer if the conflict intensifies.
Commodity strategist Daniel Hynes at ANZ said oil storage in the US has hit technical limits that could trigger infrastructure breakdowns. Once supplies tighten that severely, buyers will compete aggressively for scarce seaborne cargoes, driving prices even higher. He estimated realistic prices of $80 to $90 a barrel now and suggested $100 could come into view if the conflict persists another few weeks.
"The market is at a critical juncture," Hynes said.
Yeaman warned that if no negotiated solution emerges by late August or early September, oil could spike as high as $150 a barrel, echoing worst-case scenarios from the early phase of the conflict. He expects the government would likely reinstate full fuel excise discounts in such a scenario to shield households from the shock.
The economic backdrop makes every oil price move count. Australia's growth has already begun sliding under the weight of three interest rate hikes and a falling housing market. Yeaman forecasts growth will slow to 1.5% by year-end, down from 2.5% expected for 2025. A serious Middle East escalation and prolonged closure of the Strait of Hormuz could depress growth much more severely.
The central question now is timing. Financial markets are pricing in rate rises as if the conflict will persist long enough to force inflation higher without sufficient offsetting growth gains. Yeaman's resistance to that view reflects lingering hope that diplomacy will break through before the damage becomes irreversible.
But each day the conflict continues raises the odds that markets are right and policymakers will have no choice but to tighten monetary policy even as the economy weakens.
Author James Rodriguez: "The RBA is being squeezed between a rock and a hard place, and every barrel of oil that gets torched in the Middle East makes that squeeze tighter."
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