RBA warns prolonged Middle East war could hit growth, unmoor inflation expectations

SYDNEY, March 26 (Reuters) - A senior Australian central banker warned on Thursday that the longer the Middle East conflict drags on, the greater the economic damage will be and policymakers need to ensure a surge in energy prices will not dislodge inflation expectations.

In a speech in Sydney, Reserve Bank of Australia Assistant Governor Christopher Kent said the Middle East conflict has tightened financial conditions, but the supply shock also posed a risk to inflation.

"Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures."

The RBA raised interest rates for a second straight meeting this month to 4.1% as inflation stayed uncomfortably high even before the Iran war disrupted global oil trade and sent petrol prices surging to record highs in the country.

The tightening reversed two of the three rate cuts made last year but Kent stopped short of saying if monetary policy was now restrictive.

"That assessment became less clear with a combination of reductions in the cash rate target in 2025 and further increases in various model estimates of neutral," said Kent. "Those models that are more likely to capture the short-run neutral rate have risen by around 20 to 30 basis points over recent quarters."

The central bank had judged the post-pandemic peak of 4.35% in interest rates to be restrictive and were working to slow down demand.