Betashares’ chief economist, David Bassanese, argued on Thursday that the latest wave of tariffs poses a greater threat to economic growth than to inflation, strengthening the case for the Reserve Bank to cut rates as soon as next month.
“To my mind, the Q1 annual trimmed mean inflation result later this month would need to be higher than 3 per cent to rule out a RBA rate cut, whereas my base case is that trimmed mean inflation will fall to 2.7 per cent – one quarter earlier than the RBA expected in the February Statement on Monetary Policy,” Bassanese said.
AMP’s Shane Oliver echoed this view, stating that: “Assuming that Australia does not retaliate and the $A does not crash then Trump’s tariffs pose more of a threat to growth than causing higher inflation here and so add to the case for more RBA rate cuts”.
This outlook hinges on the expectation that while the 10 per cent tariff on Australia may have limited direct impact, the broader slowdown in global growth – particularly in China – could filter down to Australia.
Following Trump’s announcement, markets have increased their bets on an RBA rate cut, now pricing in a move to 3.85 per cent at the next meeting, up from a 70 per cent chance prior to the tariff news.
Some analysts now predict up to four rate cuts this year, including Tim Toohey, head of macro and strategy at Yarra Capital Management, who on Thursday raised his forecast from two cuts previously.
"We are adding additional easing in our forecasts and now expect the RBA to ease in May, August, September and November. If the RBA were uncertain on Tuesday, then their heads must surely be spinning today," Toohey said.
The RBA held rates steady this week, but governor Michele Bullock struck a more hawkish tone, warning that escalating US trade tensions could further complicate the outlook.
She cautioned that much will depend on how other countries react to escalating US trade tensions, stressing that the current wave of trade restrictions is likely to have lasting effects.
“We’re less exposed directly to the United States, so it does depend very much on what others do. It depends on reciprocal tariffs in other countries, it depends on what China does, then it depends on the implications of all of that on trade and supply chains,” Bullock said.
“Ultimately, fragmentation in world trade, less open world trade, isn’t great for Australia, because that’s how we’ve thrived … Provided China leans in and gives fiscal stimulus, we will see an impact on our GDP growth, but it won’t be as dramatic as for some other countries that are caught up much more directly in these large tariffs.”
In its post-meeting statement, the RBA also touched on the US predicament, noting that while many central banks have eased monetary policy since the start of the year, they have become increasingly attentive to the evolving risks from recent global policy developments.
In its financial stability review published on Thursday, the central bank again referred to the US, noting that “elevated geopolitical and policy uncertainty in major economies has the potential to interact with existing vulnerabilities and cause risks to rapidly materialise”.
“Ongoing uncertainty surrounding the imposition of tariffs and other trade restrictions between the United States and other major economies could have a chilling effect on business investment and household spending decisions and pose substantial headwinds to the outlook for global economic activity,” the RBA said.
“There is also considerable uncertainty about the effects of possible fiscal, regulatory and other government policy changes on global growth and inflation. In addition, the global financial system remains exposed to potential disruptions from operational incidents and climate change shocks.”
Before Liberation Day, economists were divided on the timing of future rate cuts – some expected no cuts until the second half of the year, while others saw May as the most likely window for a move.
