RBA worried higher energy costs could quickly lift consumer prices

SYDNEY, May 19 (Reuters) - Australia's central bank is worried higher energy costs will feed through to consumer prices quickly given the stretched state of the domestic economy, potentially creating a significant shift in inflation expectations.

Sarah Hunter, assistant governor at the Reserve Bank of Australia, said in a prepared speech on Tuesday that was one reason why the central bank raised interest rates for a third time this year to 4.35% this month, fully reversing the amount of policy easing made in 2025.

"The recent rise in oil prices is particularly challenging to navigate. Higher oil prices mean higher costs and higher consumer prices in the near term - that is a given," Hunter said in remarks for the Bloomberg Forum for Investment Managers.

"But this shock has come against a backdrop of elevated capacity constraints and domestic cost pressures... our research suggests pass-through will be faster and more extensive, and the risk of inflation expectations drifting higher is elevated."

Hunter noted some firms have already raised fuel surcharges and some construction companies were reviewing prices for new contracts.

Significant uncertainties remain, she added. Oil prices could stay elevated for longer and the Iran war could lead to broader and more persistent supply disruptions and add to inflation. Brent crude futures were back at two-week highs on Monday, trading above $110 a barrel, as the Strait of Hormuz remained closed.

However, inflation may be lower if households cut back on consumption and businesses scale back on investment more than expected, she said.

(Reporting by Stella Qiu; Editing by Edwina Gibbs)