Shock to ‘force’ RBA to cut interest rates further than expected: ‘More aggressive’

The Reserve Bank of Australia (RBA) could be pushed to take a “more aggressive” rate-cutting approach following the conflict in the Middle East and the potential oil price shock. Some analysts now expect the central bank could cut interest rates a further three times this year.

KPMG has estimated the conflict in the Middle East could shave between 0.15 and 0.20 per cent of the GDP from the Australian economy this year, should the world oil market react in a similar way to how it responded to the first Iraq War. It said an “oil shock” combined with the continuing threat of a global tariff fallout could “force” the RBA’s hand.

“The longer an oil price shock is sustained, the worse its impact is in terms of inflation outcomes, inflation expectations and short-term growth,” KPMG said.

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“This is because oil price shocks can be particularly damaging to an economy like Australia’s as the road transport sector — one of the heaviest users of oil in our economy — touches every single other sector (including itself) across the country.”

Global oil prices slid 7.2 per cent on Monday following Iran’s retaliatory missile strike on a US airbase. The Brent crude price fell to around $US70 a barrel. This has eased fears of major supply disruptions, but markets remain cautious as tensions continue.

KPMG said it had revised down its RBA cash rate forecasts and now expects a further three rate cuts this year, one more than its original expectation at the start of 2025, bringing the cash rate down to 3.1 per cent by the end of the year.

It expects the RBA to “look through” any short-term inflationary impact of any oil shock and noted this would be combined with core inflation now looking well entrenched in the target band and overall weakness in the Australian economy.

If the RBA cuts interest rates three times, homeowners could see their repayments drop by $265 a month. That’s based on someone with an average $600,000 loan with 25 years remaining.

Markets have an 86 per cent expectation of an interest rate change at the next RBA meeting in July and are almost fully priced in for three more reductions by the end of the year.

NAB is the only Big Four bank predicting an interest rate cut next month, with ANZ, Commonwealth Bank and Westpac expecting a cut in August.

Westpac chief economist Luci Ellis said the RBA would be more focused on inflation than the oil price.