The War Abroad, the Rate Rise at Home

A fourth increase, and the door stays open

The Reserve Bank’s Monetary Policy Board voted unanimously to lift the cash rate target from 4.35% to 4.60%, effective 30 September. The accompanying statement said that global energy prices were “much higher than had been assumed in the August forecasts”, and that recent data pointed to stronger growth and inflation than the bank had expected. It also stated that the Board will continue to do what it considers necessary to bring inflation back to target, including raising the cash rate further if needed.

Governor Michele Bullock described the new setting as restrictive. She also cautioned that the decision was not simply a reaction to energy prices: “This isn’t all about the Middle East conflict.” That qualification matters, and the data below show why.

Where the war shows up: the petrol pump

The Australian Bureau of Statistics reported that automotive fuel prices rose 14.8% in August alone, after a 7.5% rise in July. It attributed the increase to two forces: higher world oil prices, and the final unwinding of the federal government’s fuel excise relief measures. One of those forces is international and the other is a domestic policy decision, which is a useful reminder that not every dollar of the increase can be charged to the conflict.

The international force is nonetheless the larger story. Press reports date the start of the conflict to March, the month in which annual inflation peaked at 4.6% in the ABS series. AAP reported that, at an earlier stage of the shock, the Strait of Hormuz was closed and benchmark oil rose from about US$70 to as high as US$119 a barrel. The Treasurer, Jim Chalmers, called the war a “very, very big factor” in Australia’s inflation.

Annual inflation, March to August 2026

All-groups CPI, year-on-year change. The shaded band is the RBA’s 2% to 3% target.

Headline versus underlying: reading the 4.0%

The headline figure overstates the trend, but not by enough to relieve the central bank. The ABS trimmed mean, which removes the largest price swings, held at 3.6% for a third consecutive month. Automotive fuel and electricity were both excluded from it, and they were the main drivers of the gap between the headline and underlying measures.

Even so, 3.6% sits above the top of the target band. Housing was the largest contributor to annual inflation at 5.7%, with new dwelling prices up 5.4% as builders passed on higher costs for materials and labour. These are domestic pressures, and they help explain why the bank moved. Governor Bullock has also noted that the conflict has raised fertiliser and transport costs, and the bank’s own commentary points to businesses passing higher input costs on to customers.

Where annual inflation comes from

August 2026, 12-month change by selected measure.

The pump price shock

Monthly change in automotive fuel prices.

A synchronised tightening

Australia is one of several economies tightening for the same reason. The European Central Bank raised its deposit rate to 2.50% on 10 September. The Federal Reserve lifted its target range to 3.75%-4.00% on 16 September, the Bank of Japan moved to 1.25% on 18 September, and the South African Reserve Bank took its repo rate to 7.25% on 23 September. The Reserve Bank of Australia followed on 29 September.

The common thread is energy. Eurostat’s flash estimate put euro area inflation at 3.8% in September, and energy prices in the euro area were 14.3% higher in August than a year earlier. Central banks cannot lower the price of oil. What a rate rise can do, as Governor Bullock has argued, is contain the domestic pressures that high energy prices set in motion: wage claims, pricing behaviour and inflation expectations.

Policy rates after the latest increases

Latest policy rate in each economy. The US figure is the top of its target range.

The squeeze at home

The domestic economy is slowing even as prices accelerate. According to reporting on the bank’s statement, house prices fell in most capital cities and new housing loans declined, while the labour market has eased. Unemployment stood at 4.6% in August, already above the bank’s own August forecast of 4.5% for the December quarter, according to analysis from Westpac. Gross domestic product grew 0.4% in the June quarter and 2.1% over the year.

That is a difficult combination. Prices argue for tighter policy, and the economy argues for patience. The Board resolved the tension in favour of prices, which tells us how seriously it takes the risk that high inflation becomes embedded.

6Three scenarios for November

The Board meets again on 3 November. Westpac’s economists now treat a further increase as their base case, and press reports noted market speculation about two more rises, to 5.10%. The governor declined to comment on that pricing. We set out below how the evidence could point in each direction. This is our analytical judgement, not a forecast.

Scenario	What it would look like	Likely stance
Oil eases	Energy prices fall back, fuel stops rising, and headline inflation converges on the 3.6% underlying rate.	Hold at 4.60%. Governor Bullock has said inflation should start to ease if oil prices decline.
Conflict persists	Oil stays high, businesses keep passing on costs, and the September-quarter trimmed mean is strong. CBA’s economists note that a result of 1% or more could put another rise on the table.	Further increase, consistent with the Board’s stated willingness.
Slack widens	Unemployment rises faster than forecast and falling house prices and weaker lending cut into household spending.	Pause, even with elevated headline inflation.

What to watch

Three indicators will decide the next move: the path of world oil prices and any further disruption to supply through the Strait of Hormuz; the September-quarter trimmed mean inflation figure; and the labour market data, where a faster rise in unemployment would strengthen the case for pausing. Over all of them stands the 3 November meeting, which will show whether the Board regards August’s fuel-driven jump as a shock to be looked through or a trend to be stopped.