The RBA says the Middle East conflict has "broadened" and pushed energy prices well above its August assumptions – one of the forces behind the rise in the cash rate to 4.60%.

The conflict is thousands of kilometres away, but its effects travel. They show up first at the petrol bowser and in freight invoices, then in the costs businesses pass on to customers, and finally in the calculations of a central bank deciding what to do with interest rates.

That chain of events was spelled out in the statement the Reserve Bank of Australia's Monetary Policy Board released on 29 September 2026, when it lifted the cash rate target by 25 basis points to 4.60%, effective 30 September. The Board said the Middle East conflict has "broadened", and that global energy prices are "now much higher" than at the time the RBA prepared its August forecasts.

Governor Michele Bullock was blunt about the consequences at her media conference: "the Middle East conflict has been a big shock, and it's made us all poorer in this country".

From a distant conflict to a local price tag

How does a conflict overseas end up affecting an Australian mortgage? The path runs through prices.

Energy is an input into almost everything. When global oil and energy prices rise, the effect is felt directly in fuel and household energy costs, and indirectly in the cost of transporting goods, running factories and operating farms. Businesses facing higher input costs often pass at least part of those increases on to customers.

The Board's statement highlighted exactly this dynamic. It said "global oil supply disruptions are maintaining upward pressure" and that "Firms are experiencing cost pressures", with businesses increasing or planning to increase prices. The Governor added that "Businesses in our liaison program continue to expect strong increases in their costs."

Those price increases feed into inflation. Headline inflation was 4.0% over the year to August on the monthly CPI indicator. The Governor said underlying inflation has "been about 3.5 per cent for the past six months". Both are above the RBA's 2–3% target band.

And inflation is what the cash rate responds to. Because the Board's job is to return inflation to target, an external shock that pushes prices higher can ultimately translate into higher borrowing costs at home.

"Made us all poorer": what an energy shock does to an economy

The Governor's phrase deserves unpacking. When the price of energy rises because of events overseas, the country as a whole has to devote more of its income to buying the same amount of energy. That leaves less for everything else. In that sense, a sustained energy price shock acts like a reduction in real income – even if pay packets are unchanged in dollar terms.

That fits with other remarks the Governor made about household pressures: "Every household has seen how the price of everything has gone up in recent years", and "Pay packets don't go as far as they used to".

This creates a genuine dilemma for a central bank. An energy shock tends to push inflation up while also weighing on spending and growth. Raising interest rates addresses the first problem but adds to the second. Central banks sometimes choose to "look through" a temporary supply shock, reasoning that it will fade on its own and that rate rises cannot increase the supply of oil.

Why the Board did not look through it

In this case, several features of the situation made looking through the shock harder.

First, inflation was already above target before the latest energy price increases. The statement said "inflation remains elevated" and that "recent inflation outcomes in Australia were stronger than expected at the previous meeting".

Second, domestic demand has been resilient. The Governor said "Domestic spending and investment have been stronger than expected", and the statement pointed to "pressure on domestic capacity". An economy running close to capacity makes it easier for businesses to pass higher costs on.

Third, there is the risk that higher prices change behaviour. The Board said high inflation must not become "embedded", and the Governor said: "It's critical that we stop expectations for high inflation from becoming embedded." If households and businesses come to expect persistently high inflation, they may set prices and negotiate wages accordingly, making inflation harder to bring down.

The Governor summed up the Board's revised view: "Inflationary pressures will persist for longer than previously expected."

Forecasts overtaken by events

The broadening of the conflict also means the RBA's most recent published forecasts need to be read with care. The August Statement on Monetary Policy, published on 11 August 2026 when the cash rate was 4.35%, forecast trimmed mean inflation to reach the 2.5% midpoint by early 2028, while expecting both headline and trimmed mean inflation to "remain elevated in the near term".

Those forecasts predate both the September rate rise and the further increase in global energy prices the Board has since described. By the Board's own account, energy prices are now "much higher" than assumed at the time.

The statement also noted "heightened uncertainties", saying the conflict remains "unresolved", with scenarios in which inflation could be higher and activity lower than forecast. That is the uncomfortable combination an energy shock can produce.

Signals to watch in the weeks ahead include:

  • Whether the conflict broadens further or begins to stabilise.
  • How global energy prices move from here, and how quickly they flow into local fuel and freight costs.
  • Whether business price-setting intentions start to moderate.
  • What the 28 October CPI release shows about both headline and underlying inflation.

The bottom line

The Middle East conflict is not a distant story for Australian borrowers. By pushing up energy prices, it is adding to inflation at a time when inflation was already above target and domestic demand was resilient – a combination that made the Board unwilling to look through the shock. The Board has said it "will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed." How the conflict evolves will be one of the key inputs as the Board approaches its next decision at 2:30 pm AEDT on Tuesday 3 November 2026.