Australia is facing two years of very slow economic growth as a resumption of hostilities in the Middle East threaten to keep inflation at higher levels and spark more interest rate rises.

The International Monetary Fund’s latest World Economic Outlook report is predicting Australia’s economic growth pace will slow to 1.9 per cent in 2026 and just 1.7 per cent in 2027, based on financial years ending in June.

The IMF has joined Deloitte Access Economics in predicting two years of weak growth, below 2 per cent, which would mark the weakest sustained expansion since the aftermath of Australia’s 1991 recession.

The updated forecasts were published as the Brent price of crude oil soared by another 6.4 per cent in one day to be above $US78 a barrel for the first time since June 23 after US President Donald Trump declared the ceasefire with Iran was “over”.

As recently as April, the IMF was forecasting average petroleum spot prices of $US78 a barrel and $US100 in a worst-case scenario, but in its latest July report, had revised that down to $US78 a barrel.

“Elevated energy prices and higher headline inflation readings have stoked inflation expectations for 2026 across countries, whereas expectations for 2027 have moved much less,” the IMF said.

A collapse in the US-Iran Memorandum of Understanding is likely to cause further increases in crude oil prices, the Commonwealth Bank’s head commodity strategist, Vivek Dhar, said.

“Therefore, Brent oil futures stand to gain the most in coming days if oil tanker traffic through the strait declines sharply,” he said.

Crude oil prices had begun to decline in the second week of June in the days before the US and Iran signed that Memorandum of Understanding at the Palace of Versailles in France.

But attacks on ships transiting through the Strait of Hormuz this week saw crude oil prices rise again, sparking fears of a global shortage of crude oil.

“In any case, the countdown clocks on inventory depletion will start again if oil tanker traffic through the strait dries up,” Mr Dhar said.

Oil refineries in Asia, that supply Australia with 80 per cent of its domestic unleaded and diesel fuel needs, source crude oil from the Middle East.

Australia’s fuel tax relief is being extended until August 2, but at a halved rate of 16 cents a litre factoring in excise and the GST.

Higher petrol prices risk keeping inflation at elevated levels, with Australia’s 4 per cent consumer price index in May marking the tenth consecutive month of annual headline inflation being above the Reserve Bank of Australia’s 2-3 per cent target.

The IMF has stressed interest rates would have to rise globally to address high inflation, a day after the Reserve Bank of Australia’s chief economist, Sarah Hunter, said another rate rise was likely at the expense of the labour market.

“Monetary policy should continue to remain focused on preserving price stability,” it said.

“Appropriate responses depend on the varying effects across countries of higher commodity prices, as well as technology-driven demand, and the spillovers to inflation expectations.

“Where inflationary pressures are visible but judged to be temporary and inflation expectations remain anchored, central banks should keep real rates broadly constant over a reasonable horizon, which may imply raising nominal policy rates.”