A sharp reduction in the global supply of oil, natural gas, and other commodities, as well as heightened geopolitical and economic uncertainty globally due to the conflict in the Middle East, implies a tighter stance of monetary policy for a given cash rate, according to a speech by Christopher Kent, the Reserve Bank of Australia's (RBA) assistant governor of financial markets.

The supply shock also poses a risk to inflation and longer-term inflation expectations at a time when there are ongoing capacity pressures in Australia, he said. The longer the conflict persists, the larger the economic impact will be, and the greater the risk of a material repricing of assets.

The monetary policy board sets the cash rate to deliver financial conditions that are consistent with low and stable inflation and full employment. To assess the stance of monetary policy, the cash rate can be compared to the nominal neutral rate of interest.

If inflation is elevated and likely to remain above target for a time, as is currently the case, a restrictive stance of policy is needed for a time to slow the growth of aggregate demand and ease inflationary pressures.

Part of the monetary policy board's decision to raise the cash rate target in February and March was an assessment that financial conditions in the second half of 2025 had been less restrictive than previously thought.

This reassessment was based on evidence from updated estimates of the neutral interest rate as well as direct measures of financial conditions, such as strong credit growth and low risk premia in financial markets. The neutral cash rate can vary over time, and it is estimated with considerable uncertainty, Kent added.