Markets are asleep at the wheel, RBA warns of hidden global risks

The Reserve Bank of Australia (RBA) has issued a pointed warning to investors: markets appear too relaxed about growing geopolitical risk. While the world grapples with instability — from shipping tensions in the Red Sea to uncertainty in major election cycles — the RBA signals that the financial system might be mispricing risk and underestimating the possibility of sudden shocks.

This warning arrives during a fragile moment. Australia’s inflation has moderated from its 2022 peak (CPI peaked at 7.8% YoY and has been trending downward), yet remains above the RBA’s 2–3% target range. Markets had been expecting rate cuts, pricing in optimism that inflation would fall without major disruption. The RBA’s caution suggests that this optimism may not be grounded in reality.

The bank’s main concern: geopolitical instability can reignite inflation through energy and commodity channels. Australia is deeply integrated into global trade systems. Roughly 45% of the country’s exports are tied to commodities whose prices react sharply to geopolitical shocks. Even short-term disruptions can ripple across shipping, insurance, and futures pricing.

Investors, however, have been acting as though volatility is receding. Equity markets have remained buoyant, and Australian bond spreads have tightened, signalling confidence. The RBA argues that such pricing doesn’t reflect true uncertainty. Markets often behave this way late in a tightening cycle — assuming the worst is behind them — but historically, geopolitical shocks don’t follow economic timing.

The RBA is also focused on the risk of supply chain fragmentation. Since 2020, companies have been shifting from “just-in-time” to “just-in-case” models. This transition increases inventory costs, which eventually feed through to prices. If global tensions escalate, Australian importers could face shipping delays and higher freight costs. That would challenge the RBA’s progress in lowering inflation.

Financial complacency poses another risk: if markets misprice risk, corrections become more violent. Asset repricing tends to be disorderly, not gradual. This raises the odds of volatility spikes, bond sell-offs, or a sharp currency shift. The RBA is essentially urging investors to acknowledge the tension and prepare.

Yet, the RBA’s message is not pessimistic — it’s strategic. Australia’s economy remains resilient, supported by strong labour participation and robust export demand. But the bank refuses to declare victory over inflation while geopolitical forces remain unpredictable.

The subtext is clear: optimism is fine, complacency is not.