Escalating Conflict Could Trigger Fourth Interest Rate Increase
Economists have warned that ongoing conflict between the United States and Iran could drive oil prices above US$100 per barrel, increasing the likelihood of a fourth interest rate rise by the Reserve Bank of Australia (RBA) this year if the situation is not resolved within a week.
Recent US missile strikes on Iran and President Donald Trump’s announcement of a new maritime blockade have pushed oil prices to their highest levels in a month since tensions escalated between the two nations.
On Tuesday morning, Brent crude oil prices reached US$85 per barrel, while the West Texas Intermediate (WTI) benchmark for US crude exceeded US$80 per barrel. Both benchmarks had been trading near US$70 in early July.
Potential Impact on Oil Prices and Inventories
Vivek Dhar, energy commodities strategist at Commonwealth Bank, noted in a Tuesday report that escalating hostilities could deplete global oil stockpiles and drive prices significantly above the April peak.
“The clock has started ticking again on global oil inventory depletion,” Dhar said.
He projected that continued conflict could push Brent crude prices to US$100 per barrel within 10 days and potentially reach US$150 per barrel within 10 weeks.
In April, crude prices at US$110 per barrel had caused Australian unleaded petrol prices to approach 260 cents per litre and diesel prices to near 320 cents per litre.
Rising Fuel Prices in Australia
July’s increase in oil prices has already elevated wholesale diesel prices from 177.1 cents per litre at the start of the month to 186 cents per litre as of Tuesday, according to the Australian Institute of Petroleum.
Diesel prices at service stations have risen correspondingly, reaching approximately 190 cents per litre in major capital cities, based on data from MotorMouth.
Peter Khoury, spokesperson for the NRMA, commented on the market’s response to the conflict and fuel prices.
“Markets had accounted for breakdowns in negotiations but fuel would start to get more expensive if oil prices remained elevated for more than a week.”
Additionally, the federal government’s fuel excise relief is scheduled to expire on 2 August, which is expected to increase prices by another 16 cents per litre.
Implications for Interest Rates and Consumer Confidence
Matthew Hassan, head of macro-forecasting at Westpac, stated that the resurgence in oil prices supports the bank’s forecast that the RBA will raise interest rates in August.
“It will feed into their [the RBA’s] unease that this inflation will be persistent,” he said.
Market expectations for an RBA rate hike have increased since the resumption of strikes on Thursday, with a 23% chance of a hike in August and over a 50% chance by December. The RBA has already raised rates three times in 2026, bringing the cash rate to 4.35%.
Renewed hostilities have also negatively affected household confidence in the economy, according to the Westpac-Melbourne Institute consumer confidence tracker released on Tuesday.
“In the absence of that [conflict], we probably would have seen a more substantive recovery for the month,” Hassan said.
The survey indicated that prior to the escalation, consumers were becoming less fearful of interest rate rises and more optimistic about their family finances improving within a year. However, most remained pessimistic overall and anticipated further rate increases in the coming year.
My Bui, an economist at AMP, noted that higher oil prices combined with the increased likelihood of a rate rise would reduce consumer confidence back toward levels seen in April.
“The employment market hasn’t yet deteriorated to concerning levels, and price pressures are still around. So we continue to see higher chance of a hike from the RBA in the August meeting,” Bui said.
