Update on the Iran War: the Mexican Standoff

Where Things Stand

Sixty-one days after Operation Epic Fury began, the war has settled into a structure neither side wants to call by its real name. The shooting has mostly stopped. Nothing else has been resolved.

A two-week ceasefire took effect on 8 April after Pakistani mediation. Trump has since extended it indefinitely. Both sides have accused each other of repeated violations. On 11 and 12 April, US and Iranian officials met face-to-face in Islamabad for twenty-one hours, the highest-level direct talks since 1979. They produced nothing. By 12 April Vance had publicly conceded no agreement. By 13 April the US Navy had imposed its own blockade on Iranian ports. By 18 April Iran had reimposed the Hormuz closure it nominally lifted the previous day.

This is the war now. A dual blockade with no agreed terms, no fixed deadline, and no visible off-ramp. Iran controls the Strait of Hormuz. The United States controls Iranian ports. Both sides are inflicting sustained economic pain on each other and on third parties who never asked to be involved. US Central Command (CENTCOM) has redirected 38 ships from Iranian ports. Iran has reduced Hormuz traffic to a trickle. The Pentagon has assessed that mine clearance alone could take six months.

Central Bank Purposefulness, Take Two

I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:

• Don't be a cowboy;
• No surprises; and
• Stay in your lane.

The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.

Should the RBA Raise Rates in May 2026

The Monetary Policy Board meets on 4 to 5 May. The cash rate sits at 4.10 per cent after two consecutive 25 basis point hikes in February and March, the first reversals of the easing cycle that ran through 2025. Markets are pricing roughly a 60 per cent chance of a third hike. The case for or against another move depends on what the data say about the underlying inflation problem, not on what borrowers would prefer to hear.

The framework set out in Inflation: Causes, Diagnosis and Cures is a useful discipline here. Diagnose first. Decide second. Skipping the diagnostic step is how public commentary about monetary policy generates more heat than light. So let me work through the diagnosis using the five drivers the framework identifies, then turn to the policy question.

Inflation: Causes, Diagnosis and Cures

The Bloomberg Commodity Index, a broad-based benchmark covering energy, metals, and agricultural commodities, is up at the moment. In the past this index has been correlated with periods of higher inflation.

Weekly Energy Price Update

 Spot prices

Stagflation: the Lead in Australia's Saddle

Previously I argued that the Reserve Bank's credibility is a critical defence against a repeat of the 1970s stagflation experience. That is true, but it is only half the story. The other half is the architecture around the central bank, which determines whether that credibility can do its work. 

This post is about the broader architecture necessary to manage inflation, told through the question that the set of charts below forced me to confront: Why did Australia take so much longer than everyone else to get inflation back under control after the 1973 oil shock? The UK, Japan and Italy all had an inflation peak higher than Australia's in the wake of the oil shock. All were broadly back towards pre-shock inflation levels in three to eight years. Australia took 15+ years. 

Stagflation

I grew up with stagflation. In the 70s and 80s it was the word everyone reached for, here and abroad. Inflation and unemployment were both pushing towards double digits at times. The misery index piling up month after month. And it stuck around. The United States got out because Paul Volcker (Chairman of the Federal Reserve 1979-1987) broke the back of US inflation at the cost of a brutal global recession in the early 1980s. Australia took longer to reset, and only fully closed the chapter with the recession we had to have in the early 1990s.