‘More uncertainty’: Rate cut on the cards as economic fallout continues

A July rate cut remains on the cards, but Aussie households could still be impacted by another hit to the cost of living.

In mixed news for households, the conflict between Israel and Iran is unlikely to impact future rate cuts unless the worst-case scenario plays out.

Economics forecasts say the conflict that started on Friday will add about 0.2 per cent to headline inflation on the back of higher petrol prices.

AMP chief economist Shane Oliver told NewsWire the escalation just added more “uncertainty” but hadn’t changed the probability of a July rate cut.

“I don’t think the probability of a July cut has changed, we still expect a rate cut in July, August, November and February, taking the official cash rate to 2.85 per cent,” he said.

Petrol prices could jump on the back of the Israel-Iran crisis. Picture: NewsWire / John Gass

IG market analyst Tony Sycamore said it would all depend on the fallout, with the worst-case scenario being Iran blocks the Strait of Hormuz, which is the primary route for oil producers including Saudi Arabia, Iraq, the UAE, and Kuwait.

While pointing out blocking the Strait of Hormuz was a “last resort” move by Iran, Mr Sycamore said if it did happen, it could impact interest rates.

“This would hamper central banks’ ability to cut interest rates to cushion the anticipated growth slowdown from President Trump’s tariffs, which adds another variable for the Fed to consider when it meets to discuss interest rates this week,” he said.

Mr Oliver agreed, saying any blockage could lead to a dramatic spike in oil prices.

“During the Ukraine conflict we saw oil get to above $US120 a barrel, which would see petrol prices push well above $2 a litre, impacting inflation and more importantly household spending power,” he said.

“The RBA would then have to work out what is more important and I suspect they would look through the inflation spike and be more concerned about the negative impact on economic growth.”

Higher oil prices could flow through to the wider economy. Picture: NewsWire/ Gaye Gerard

Regardless of whether it sways the Reserve Bank of Australia, the fallout will still hurt Australian consumers.

Futures markets for Brent oil have spiked in recent days and are now pricing $US77 a barrel when it was just more than $US65 this time last week.

Every $US1 increase in the price of oil roughly adds 1 cent a litre to how much Aussies will pay when they fuel up.

MST Financial senior energy analyst Saul Kavonic warned that “higher oil prices will flow directly through to the pump”, adding to the cost-of-living pressures.

”If you start to see prolonged higher prices or even an energy crisis scenario, it will also flow through to our electricity prices via international gas prices,” Mr Kavonic told the ABC.

He said this would eventually hit Australian consumers.

“It will flow through to the cost of living because nearly every single thing that you buy and use on a day-to-day basis has energy as a core input cost along its supply chain,” Mr Kavonic said.

Originally published as ‘More uncertainty’: Rate cut on the cards as economic fallout continues