The sharply
deteriorating situation in the Middle East has
the potential to do immense damage. First, to the long-suffering residents of
this benighted area, including 20,000-odd people with dual Australian-Lebanese
citizenship. (For an update by an
expert,
live and exclusive, click here.) Second, to the
global economy. Oil is close to $80 per barrel and if the conflict gets even
hotter, the sky is the limit for oil and at some point this will dent prospects
for continued strong growth. Third, to owners of
equities, with markets already spooked and again falling substantially after the
partial recovery following the big shakeout from
mid-May.

Regular readers
will know that Henry has been visiting Greece and Turkey, and is relieved to be home safely after a
flight across Iran over the
weekend. Against the deeply
tragic backdrop of war (again) in the Middle
East, it is hard to get excited about the local struggle for the
leadership of the Liberal Party. However, boys will be boys and this is
probably a struggle we have to have. There is not much to be added to the acres
of newsprint and TV coverage, although it was interesting to read the
contrasting perspectives of Barry
Cohen and Glenn
Milne
in the
Oz today.

Henry reread RBA
Deputy-Governor Glenn Stevens’s recent speech over the weekend, and commends it
as a cool exposition of how monetary policy is sensibly considered and
implemented. Stevens’s point about the relative importance of global influences
of the local economy was particularly apposite, and brings us back full circle
to the gloomy international scene.

Notwithstanding
Henry’s long-held and consistently stated view that local interest
rates
should be higher, current international developments will provide a perfectly
respectable case for holding off on the rate hike currently expected in early
August.

More reading at
Henry Thornton.