Australian households could face further interest rate rises and a weaker jobs market as escalating conflict in the Middle East threatens to prolong inflationary pressures, the Reserve Bank of Australia’s chief economist has warned.

Speaking in Canberra on Wednesday, RBA Assistant Governor Sarah Hunter said the central bank is confronting increasingly difficult decisions as global geopolitical tensions create fresh economic shocks. While the bank remains committed to returning inflation to its target range, doing so may come at the cost of slower economic growth and higher unemployment.

Her comments come as the United States confirmed it had launched new strikes on Iran following alleged attacks on civilian-crewed vessels in the Strait of Hormuz. The renewed conflict has sent oil prices soaring by around six per cent, intensifying concerns over global supply chains and the broader inflation outlook.

For the RBA, developments such as the conflict in the Middle East represent what economists describe as a “supply shock”—an event that disrupts the supply of goods and services, driving prices higher while simultaneously weighing on economic activity.

Ms Hunter said the duration of these shocks would be critical in determining their impact on inflation.

“If people expect the shock to be over quickly, they are less likely to respond to it,” she said.

“By contrast, 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 warned that supply-side disruptions are becoming more common, forcing the RBA to confront increasingly frequent trade-offs between controlling inflation and supporting economic growth.

“These shocks appear to be becoming more frequent,” Ms Hunter said.

“That means the RBA—and the economy more broadly—may have to face these trade-offs, and the costs that come with them, more often in the years ahead.”

Australians have already endured three interest rate increases this year, with the cash rate climbing from 3.60 per cent to 4.35 per cent, its highest level in two years. Despite the aggressive tightening cycle, Ms Hunter said monetary policy alone cannot shield Australia’s economy from international developments.

“Economic spillovers from rising geopolitical tensions, trade fragmentation, and the increasing prevalence of extreme climate events are just some of the shocks we are now experiencing,” she said.

“As a small open economy, we are buffeted by changes in the global environment.”

She emphasised that while interest rates are an effective tool for managing demand, they cannot resolve the underlying causes of supply disruptions or improve long-term productivity.

“Monetary policy is a demand management tool. We can’t use it to materially change the economy’s trend rate of productivity growth or maximum sustainable employment,” she said.

The Reserve Bank’s challenge lies in balancing its dual mandate of maintaining low and stable inflation while supporting full employment. Supply shocks complicate that objective because they tend to push inflation higher even as they slow economic growth.

“Some types of economic disturbances, or shocks, will put our mandate outcomes into conflict by pushing up inflation while also weighing on demand and activity,” Ms Hunter said.

“Supply or relative price shocks can create a trade-off for monetary policymakers if they are likely to have a persistent impact on inflation and the broader economy.”

She acknowledged the dilemma facing policymakers.

“All else equal, a persistently higher outlook for inflation suggests that interest rates should be raised,” she said.

“But at the same time, weaker economic activity and so more excess supply suggests that interest rates should be cut.”

Ms Hunter described the tension as a trade-off that “cannot be avoided” and suggested prolonged conflict in the Middle East could force the Reserve Bank to reassess its forecasts.

Current projections from both the RBA and the Treasury do not expect underlying inflation to return to the bank’s target range of two to three per cent until late 2028.

Despite the increasingly uncertain global outlook, financial markets are not yet expecting another immediate rate increase. With the RBA’s next policy meeting less than a month away, markets are pricing in just a 19 per cent chance of a fourth consecutive rate hike.

Ms Hunter stressed that the central bank’s role is to prevent temporary shocks from becoming embedded in the broader economy.

“A central bank can only decide how to balance the impact on inflation and activity, while ensuring that temporary shocks do not become persistent inflation,” she said.

While acknowledging the difficult choices ahead, she reaffirmed that restoring price stability remains the RBA’s priority.

“The board will continue to act as needed to ensure inflation returns to target and the labour market to sustainable full employment,” she said.

The Reserve Bank will announce its next cash rate decision on 11 August.