Cooling economy and Iran backdown to keep RBA at bay

Economists are now broadly forecasting the RBA board, led by Michele Bullock, to keep rates on hold this year. (ABC News: John Gunn) Link copiedShareShare articleA double-sized dose of relief. That's what the Reserve Bank board members will be feeling today when they meet to thrash out our future interest rate movements. Within the space of a few weeks, the picture has changed dramatically. The pressure to keep pushing rates ever higher has suddenly dissipated. There's almost a universal consensus that rates will remain on hold this year, with possible cuts next year. The economy is cooling, with inflation showing signs of moderating, unemployment rising and growth all but stagnating. But two key factors have also emerged that have given the RBA some breathing space. The property market is in retreat in the two biggest capitals and price gains are slowing elsewhere. Three rate hikes in succession, affordability levels that were off the charts and the federal government's mooted tax changes to limit property investors has poured an ice bucket over property speculation in the past few months. Donald Trump's all-out attempt to put an end to his ill-fated war with Iran has finally yielded a result, and just in the nick of time. Donald Trump has cancelled strikes on Iran. (Reuters: Evan Vucci) Benchmark oil prices immediately fell to about $US84 a barrel yesterday which, if sustained, would allow the federal government to reinstate its fuel excise without impacting inflation data too much. Global oil reserves are now plumbing the lowest levels in decades and many analysts feared any continuation in the hostilities risked tipping the global economy over the edge, possibly by September. Donald Trump is hoping to see ships moving freely through the Strait of Hormuz once again. Whatever happens, Iran will have a say in it. (Reuters) The worst oil crisis in more than half a century already has fired up inflation across the globe, even as oil prices were kept mostly in check by the steady release of oil reserves. Rate hikes are now on the cards for Japan and Europe, and with US inflation flaring in each of the past three months, a further breakout in global energy prices would have made it difficult for the new elected US Fed boss Kevin Warsh to do anything other than raise borrowing costs. Like most of its peers, the RBA's central forecasts for the economy were based upon a quick resolution to the war. The longer it has ground on, the more dire the impending downturn. Another spike in oil prices beyond $US120 a barrel would have sent inflation soaring and all but killed global growth. For Australia, early signs of the economic hit were evident in the most recent GDP data. Had it not been for the surge in data centre investment, the economy would have shrunk in the first quarter. And that was before the full impact of the war and the interest rate hikes had spread their pain through the system. The truce may have been welcome but the world is far from a resolution. While the US president declared an immediate reopening of the Strait of Hormuz, it will in fact remain shut until Friday, when the agreement is signed. Donald Trump has attempted to bring the conflict to a close a number of times since the US and Israel went to war with Iran. (Reuters: Marco Bello) And despite Trump's claims of victory, Iran has emerged from the bombardment with its regime intact and a new-found sense of power over global energy supplies. Then there is the question of Israel. While the war is supposed to cease on all fronts, will it back off from its Lebanon attacks? As Donald Trump was trying to push his Iran deal over the line, Benjamin Netanyahu showed he had other priorities. As Rabobank's Michael Every put it yesterday: "The agreement is not really a 'deal' at all, or even a deal to have a deal, but rather a memorandum of understanding staking out a framework to discuss a deal over the next 60 days." All the potential sticking points remain in place. Will Iran control shipments out of the Gulf and charge a fee? Will the US pay reparations for the damage incurred during the conflict? What about the nuclear issue? And will the US lift some sanctions against Iran? What Trump couldn't ignore was the timeline. The US midterm elections are scheduled just 80 days after the 60-day negotiating period. With US gasoline prices sending everyday living costs into orbit, immediate and decisive action was needed. Iran, in many respects, now has the US over a barrel. The most graphic illustration of that is the state of American oil reserves.

Cooling economy and Iran backdown to keep RBA at bay

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