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RBA Likely to Cut Interest Rates Again Amid Middle East Tensions
The Reserve Bank of Australia (RBA) might adopt a more proactive stance on interest rate cuts as geopolitical tensions in the Middle East escalate, potentially leading to oil price shocks. Analysts predict that the central bank could lower rates up to three more times this year to mitigate economic impacts.
Economic Impact of Middle East Conflict
KPMG has assessed that the current conflict in the Middle East could detract between 0.15% to 0.20% from Australia’s GDP, reminiscent of the economic reaction during past conflicts, such as the first Iraq War. An extended period of high oil prices could provoke inflationary pressures and slow economic growth, compelling the RBA to respond.
“This is because oil price shocks can be particularly damaging to an economy like Australia’s, which relies heavily on the transport sector, a major consumer of oil,” KPMG noted.
Oil Price Fluctuations
Recent market responses indicate a drop in global oil prices, with Brent crude falling by 7.2%, bringing it down to approximately USD 70 per barrel after tensions flared due to missile strikes on US bases. While this decline alleviates immediate concerns over supply disruptions, market participants remain cautious.
KPMG has readjusted its forecasts, now anticipating three rate cuts by the end of the year, which will likely reduce the cash rate to 3.1%. The firm believes the RBA will overlook short-term inflation spikes caused by oil prices, considering core inflation to be well within target ranges and recognizing the current weakness in the Australian economy.
Homeowners to Benefit from Rate Cuts
If the RBA follows through with these anticipated cuts, homeowners with a typical mortgage of AUD 600,000 over 25 years could see their monthly repayments drop by approximately AUD 265.
Markets are currently pricing in an 86% chance of an interest rate change at the upcoming RBA meeting in July and nearly fully expect three reductions before the year’s end. Among the Big Four banks, only NAB is projecting a rate cut next month, whereas ANZ, Commonwealth Bank, and Westpac expect cuts to occur in August.
Focus on Inflation and Growth
Westpac’s chief economist, Luci Ellis, opines that the RBA will prioritise inflation concerns over oil price shifts. “Only a significant fluctuation in oil prices would prompt a reassessment of the inflation outlook beyond the short term,” she stated. Conversely, NAB’s chief economist, Sally Auld, believes the RBA might be more focused on the growth implications of rising oil prices than the inflationary outcomes.
Petrol prices are instrumental, accounting for 3.35% of the Consumer Price Index (CPI). With CPI data set to be released soon, Commonwealth Bank analysts anticipate an annual inflation rate decrease to 2.3% for May. While they hold to the view that the next cut will likely be in August, they acknowledge that July remains a viable option.
Conclusion
With the global landscape shifting due to conflict and market responses, the RBA faces critical decisions ahead. The potential for multiple interest rate cuts this year highlights the need for a delicate balance between curbing inflation and fostering economic growth in Australia. Observers will be keenly monitoring upcoming economic indicators and RBA meetings for further signalling in this dynamic environment.
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