RBA frets over severe global shock from Middle East war
The Reserve Bank is warning that the war in the Middle East has the potential to become a “serious international shock” to the Australian economy.
International risks are “high and increasing”, Reserve Bank Deputy Governor Brad Jones said on Thursday as he announced a bi-annual health check of Australia’s financial system.
Already concerned about tense valuations and high volatility in global equity markets, the US-Israeli attack on Iran and its impact on global energy markets has further increased the RBA’s fears about risks to the financial system.
While Australia’s financial system is relatively well positioned – most households have built up financial buffers and banks are well capitalized – geopolitical pressures are intensifying.
“In terms of financial risk, volatility has increased sharply in response to the conflict in the Middle East and further shocks could lead to some deregulation of markets,” Dr Jones said.
“In terms of non-financial risk, the risk of disruption from operational, cyber and security events is currently high.”
The closure of the Strait of Hormuz, through which about one-fifth of oil supplies pass, and attacks on oil and gas infrastructure in the Middle East have caused crude oil prices to soar above US$110 per barrel.
RBA staff noted in the bank’s financial stability review that rising geopolitical tensions “could escalate into a serious international shock”.
“The conflict in the Middle East could trigger a larger shock that would destabilize the global economy, especially if supply disruptions in oil and other commodity markets last for a long time,” the report said.
“Tensions between major global powers also have the potential to escalate, with hostile cyber and other actions intensifying and the risk of global geoeconomic fragmentation as well as tensions in the international rules-based order.”
The bank warned that even after the “SaaSpocalypse” sell-off in tech companies in early 2026, risk premiums in global equity and credit markets remain extremely low by historical standards as investors panic that AI will make existing software companies obsolete.
The potential for “a sharp revision of the outlook for AI-related investments” remained.
“If expectations for the productivity benefits of increased AI-related investments are reduced, this could lead to a significant decline in profitability estimates and asset valuations,” the report said.
“There may be negative consequences for asset quality in the financial system and investment plans in the real economy.”
The growing fault lines in the domestic financial system were also on the Central Bank’s mind.
The RBA said banks were well placed to absorb significant credit losses in the economic crisis but a “disruptive regulation” in international financial markets could strain Australia’s financial stability.
The bank found subprime loans to first home buyers increased after the federal government expanded its five per cent deposit guarantee scheme; This was a sign that risky loans were increasing.
But since up to 15 percent of the value is guaranteed by taxpayers, the broader financial system will be largely insulated if defaults increase.
Banking regulator APRA on Monday announced changes to lenders’ liquidity and capital requirements, which will boost productivity by allowing them to underwrite more loans for property development and infrastructure.
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