Interest rates: Why end to Iran war could stop further Reserve Bank of Australia hikes

The US peace deal with Iran to end the Middle East war could stop the Reserve Bank of Australia from hiking rates any further, with crude oil prices now at a three-month low.

The futures market was already expecting the RBA to leave the cash rate on hold at 4.35 per cent on Tuesday, following a two-day meeting.

Economists hope the end of hostilities will help bring down inflation, as a reopening of the Strait of Hormuz should see crude oil again transported to refineries in Asia that supply Australia with 80 per cent of its fuel needs.

News of a diplomatic deal caused the Brent price of crude oil to fall to a three-month low of $US83 a barrel on Monday.

While financial market traders still see another rate rise in 2026 as a 50:50 chance, Commonwealth Bank senior economist Ashwin Clarke said the reopening of the Strait of Hormuz was likely to ease inflationary pressures.

“In the near term, the reopening in the Strait of Hormuz is expected to put downward pressure on oil prices and that should be downward pressure on inflation,” he told The Nightly.

This in turn could see the Reserve Bank cut rates twice in the second half of 2027, which would take the cash rate back to 3.85 per cent for the first time since March, undoing two of this year’s three rate rises.

“Our expectation is that the next direction will be a cut — in mid-to-late 2027,” Mr Clarke said.

“It’s a long way off and a lot can happen between now and then, there’s a lot of uncertainty around that call, but we do expect two cuts in interest rates from mid-2027.”

The halving of the fuel excise to 26.3 cents a litre is also due to expire on June 30.

The unwinding of a GST deal with the States would also see 32 cents a litre added to petrol and diesel costs.

Prime Minister Anthony Albanese is still undecided about extending that relief to motorists given the flow of crude oil to refineries in Asia would take time, even after the strait reopened.

“We’ll make our assessment over coming days,” he told reporters on Monday.

“So, whilst we want to see the conflict end, and we hope that that has occurred, we also want to be very conscious of the fact that that doesn’t mean that everything returns to normal in just a day or indeed a week or even a month.

“It will be at a minimum many months before things return to normal.”

US President Donald Trump, who turned 80 on Sunday night, announced a peace deal with Iran, 107 days after American strikes killed the Islamic theocracy’s former supreme leader, Ayatollah Ali Khamenei.

“The Deal with the Islamic Republic of Iran is now complete,” Mr Trump wrote on Truth Social.

“Congratulations to all! I hereby fully authorize the toll free opening of the Strait of Hormuz, and, simultaneously herewith, authorize the immediate removal of the United States Naval blockade. Ships of the World, start your engines. Let the oil flow!”

Before the US-Iran peace deal, the futures market was already ruling out RBA rate increases in August and September.

Inflation in April eased to 4.2 per cent from a near three-year high of 4.6 per cent in March, the first full month of the conflict.

It’s still well above the RBA’s 2-3 per cent target, with the consumer price index on the wrong side of that band for the ninth straight month.

But with unemployment at a four-year high of 4.5 per cent in April, Australia’s big four banks are now all forecasting rate cuts in 2027.

NAB is the most dovish, predicting three cuts next year that would take the RBA cash rate back to 3.6 per cent for the first time since February 2026, before the first of the three rate hikes.

Like CBA, ANZ also sees two cuts next year and no further increases this year.

Westpac, however, sees two hikes in 2026 — taking the cash rate to an 18-year high of 4.85 per cent — before two cuts in 2027 took the cash rate back to the existing level of 4.35 per cent.