Prolonged Middle East conflict would spark lower interest rates, KPMG predicts
Conflict in the Middle East could prompt the RBA to drop interest rates further than expected, KPMG has said.
On Tuesday (AEST), Trump announced that a ceasefire had been brokered between Israel and Iran on his social media platform, Truth Social. He said this after the US bombed three Iranian nuclear sites over the weekend, prompting fears of regional escalation.
“It has been fully agreed by and between Israel and Iran that there will be a Complete and Total CEASEFIRE,” Trump wrote.
“Officially, Iran will start the CEASEFIRE and, upon the 12th Hour, Israel will start the CEASEFIRE and, upon the 24th Hour, an Official END to THE 12 DAY WAR will be saluted by the World.”
Yesterday afternoon (Tuesday 24 June, AEST), Iranian state media reported that the ceasefire had begun, while Israel had not yet publicly accepted the ceasefire proposal. Israel reported that Iran had unleashed a fresh missile strike, bringing the agreement into question.
By morning, following confusion and accusations of breaches from both sides, the ceasefire had appeared to hold - albeit shakily.
"Israel will respect the ceasefire — as long as the other side does," Israeli defence minister Israel Katz wrote on X.
If conflict were to continue in the Middle East, it could shave between 0.15 per cent and 0.20 per cent off Australia’s GDP this year through its effect on oil prices, KPMG said.
In retaliation against US military strikes, the Iranian parliament voted to close the Strait of Hormuz, one of the world’s most important oil chokepoints. The final decision would rest with Iran’s national security council, Iranian news outlet Press TV reported on Sunday.
Approximately 20 million barrels of oil travel through the strait per day, the equivalent of 20 per cent of global daily oil consumption, according to the US Energy Information Administration (EIA).
“Flows through the Strait of Hormuz in 2024 and the first quarter of 2025 made up more than one-quarter of total global seaborne oil trade and about one-fifth of global oil and petroleum product consumption,” the EIA said.
A majority (84 per cent) of the crude oil and condensate shipped through the Strait of Hormuz went to Asian markets in 2024, with China being a top destination.
China is currently Australia’s largest trade partner by a large margin, comprising 37 per cent of Australia’s export market in 2023, according to data presented by the Observatory of Economic Complexity.
A slowdown in China’s economy would pose downside risks to Australia’s export sectors, especially for commodities such as iron ore.
A closure of the strait would also have direct implications for Australia's crude oil imports, maritime security specialist Jennifer Parker wrote for The Sydney Morning Herald. Australia imports 91 per cent of its fuel and most of its crude oil arrives via the strait.
Given the dominance of the Middle East in oil production and shipping, an extended regional conflict would likely result in a global oil price shock, KPMG said. This would cause a temporary inflation spike in Australia as higher oil prices feed into transportation and production costs.
However, KPMG forecast that the resulting economic drag of higher oil prices would result in marginal GDP losses peaking at between 0.30 per cent and 0.40 per cent of GDP, depending on the Reserve Bank’s reaction.
“The RBA will have a key role here,” KPMG wrote.
“It could choose to ‘look through’ the temporary higher inflation, in which case GDP growth would fall by around 0.15% by early 2026, or if the RBA adopted a tighter stance on inflation and lifted the cash rate by between 0.25% and 0.50% our GDP growth would drop a bit more (-0.2%).”
KPMG said the economic impacts stemming from conflict in the Middle East would be in addition to the anticipated economic hit from US tariff policies, which are already expected to shave 0.3 per cent off GDP growth by late 2025.
It added that an extended conflict would pose threats to GDP growth in addition to the anticipated economic hit from US tariff policies.
KPMG anticipated that the RBA would look through any temporary oil-related spike in inflation and embark on a more aggressive rate-cutting cycle if conflict escalated in the Middle East.
In light of this, it revised its cash rate forecast to 3.1 per cent by the end of the year, rather than the 3.35 per cent it previously predicted.
