A scenario outlined by the International Monetary Fund (IMF) projecting a rise in global oil prices to US$130 per barrel could see Australian petrol prices climb by up to 30 cents a litre, potentially prompting further interest rate increases from the Reserve Bank of Australia (RBA), economists warn.

The IMF's latest World Economic Outlook explores the economic fallout from an intensified Middle East conflict extending into mid-2027. In this scenario, key shipping routes through the straits of Hormuz and Bab-el-Mandeb remain largely closed to commercial vessels, oil infrastructure suffers continued damage, and oil supply recovery is delayed until late 2027. This disruption would drive oil prices higher, with the IMF forecasting prices to reach US$130 per barrel from the fourth quarter of 2026 into early 2027, up from current levels just above US$106.

In the Australian context, unleaded petrol prices in major east coast cities have recently exceeded $2.40 per litre, nearing six-month highs, while diesel remains elevated around $2.80 per litre. Applying a standard market assumption—each US$10 increase in global oil prices translates to about a 10-cent rise in retail petrol prices—economists predict a US$30 increase could push fuel prices toward $2.70 a litre. This surge would represent the highest prices since the onset of the conflict seven months ago.

Economists caution that such fuel cost increases would exacerbate inflationary pressures, potentially adding more than one percentage point to headline inflation by year-end. Jonathan Kearns, chief economist at Challenger, noted that higher fuel prices would likely compel the RBA and other central banks to implement further interest rate hikes, though the extent remains uncertain. The RBA raised rates for a fourth time last month, with minutes from that meeting acknowledging the impact of escalating Middle East tensions and elevated oil costs on inflation forecasts.

Johnathan McMenamin, head of economic forecasts at Barrenjoey, anticipates inflation reaching 4.2% in the year to September, an increase from 4% in August. McMenamin highlighted that a 10% rise in fuel prices contributes roughly 0.33 percentage points to headline inflation. He further explained that the RBA’s projection of inflation declining to 3.6% by year-end is based on Brent crude prices falling to about US$81 per barrel. If prices instead follow the IMF scenario and approach US$130, inflation could remain as high as 4.5% in late 2026.

Despite this, McMenamin expressed skepticism that the RBA would necessarily respond with further rate hikes, suggesting the central bank has been primarily addressing domestic demand pressures rather than external cost shocks. Nonetheless, rising global oil prices pose a significant risk to inflation and economic growth in Australia, complicating monetary policy decisions amid ongoing geopolitical uncertainty.