Cooling economy and Iran backdown to keep RBA at bay

analysis Cooling economy and Iran backdown to keep RBA at bay Tue 16 Jun 2026 at 4:40am A 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. And now this. 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. September disaster averted? 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. 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. LoadingLike 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. Running on empty 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. 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 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. Having drained huge amounts of oil during Russia's invasion of Ukraine, the US is in the midst of another 172-million-barrel drawdown. That will leave the reserve, a collection of salt caverns in Texas and Louisiana, with less than 350 million barrels — the lowest level since 1983, when the reserves were being filled for the first time in the wake of the 1970s oil crises. Shortages have begun showing up in large end-user markets in Asia, but to date a full-blown crisis has been averted. "Soon enough, we'll run out of shock absorbers," former International Energy Agency analyst and Kayrros founder Antoine Halff told The New York Times the weekend before the announcement. Tipping the scales Unlike some other central banks, the RBA has a dual mandate. Instead of focusing solely on inflation, it also must ensure that it maintains "full employment" for the nation. There's a bit of debate about what exactly full employment means — it no longer means everyone must have a job — but essentially our central bank can't just tip the economy into recession to ensure inflation stays under control. That means there's a tipping point between when it must switch its worrying from keeping prices under control to making sure we don't get a spike in unemployment. If we haven't already reached that point, we're now pretty close to it. And that's why, in the past week, there's been a stampede of economists retreating from the "we need more rate hikes" camp to "rates should stay on hold". While still too high, our inflation has moderated and jobless numbers are now higher than previously expected. Plus, the most recent economic growth figures were anything but inspiring, with quarterly growth of just 0.3 per cent. Since then we've seen a massive downturn in consumer and business confidence. Any settlement in the Middle East that stops the bombing, eases the suffering and allows for a return to normal trade flows will reduce pressure across the globe. But time is running short. [Image text:] eserve Aust