RBA hints at more interest rate cuts if tariffs worsen

The Advertiser

2 days ago

Minutes from the last Reserve Bank board meeting reveal why they came close to an unusually large cut, as the bank's chief economist outlines how they think Donald Trump's tariffs could hit the domestic economy.
The minutes from the bank's May meeting were released on Tuesday, shedding light on its decision to cut the cash rate by 25 basis points to 3.85 per cent.
The Reserve Bank considered an even larger reduction of 50 basis points at the meeting, due to uncertainty in global markets.
Bank board members said developments in the domestic economy alone, with slowing inflation and weak consumption growth, warranted a 25 basis point cut.
Repercussions from tariffs imposed by the US had reinforced the need to cut interest rates.
"The rise in global tariffs and increase in policy uncertainty had adversely changed the outlook for growth in Australia's major trading partners," the minutes said.
However, a 0.25 per cent cut was agreed upon as being the most appropriate, given there were still risks inflation could kick off again.
The board said if global uncertainty weighed heavier than expected, interest rates would need to be cut even more than forecast.
"Monetary policy would need to move to an expansionary setting in the event these scenarios materialised," the minutes said.
The rates market has forecast the cash rate to drop to 3.1 per cent by the end of the year.
However, the central bank said it was not yet time to make a decision on whether a more aggressive approach to cutting interest rates was needed, with board members expressing a preference to "move cautiously and predictably".
In a speech to the Economic Society of Australia in Brisbane, RBA chief economist Sarah Hunter outlined some of the bank's thoughts on how Mr Trump's tariffs would impact the domestic economy.
She said the bank had identified the key transmission channels that would impact the Australian economy and determine the board's future monetary policy response.
Firstly, trade flows would be impacted. That could push down inflation in Australia as countries divert cheap goods from countries with tariff barriers. But a broader disruption to supply chains could also result in prices rising.
The tariffs will also weigh on economic growth, as uncertainty causes businesses and to a lesser extent households to delay spending decisions.
Much will depend, though, on which direction US authorities go from here. Markets have been supported by their assumption that Trump Always Chickens Out.
If the US president lashes out to disprove this theory, markets could be in for a drastic re-pricing, which could further impact households' and businesses' decision-making.
How the rest of the world responds will also affect the economic fallout. Governments could provide fiscal support to boost ailing economies, with much hinging on the response of the Chinese administration, given the nation's outsized influence on Australian trade.
Central banks, including the RBA, will also have a role to play in dampening the economic shock through easing interest rates.
"So how will the current unpredictable and uncertain global environment transmit through to the Australian economy? The short answer is we can't be completely sure," Ms Hunter said.
The RBA will continue to monitor all these factors and adjust the assumptions that drive its monetary policy decision-making accordingly, she said.
How Australia's economy stacks up against other allies will be revealed when the OECD releases its global economic outlook on Tuesday.
The outlook comes a day before the release of data on the domestic economy's performance in the first three months of 2025.
Economists tip Wednesday's gross domestic product numbers for the March quarter will show the economy expanded by up to 0.5 per cent.
Minutes from the last Reserve Bank board meeting reveal why they came close to an unusually large cut, as the bank's chief economist outlines how they think Donald Trump's tariffs could hit the domestic economy.
The minutes from the bank's May meeting were released on Tuesday, shedding light on its decision to cut the cash rate by 25 basis points to 3.85 per cent.
The Reserve Bank considered an even larger reduction of 50 basis points at the meeting, due to uncertainty in global markets.
Bank board members said developments in the domestic economy alone, with slowing inflation and weak consumption growth, warranted a 25 basis point cut.
Repercussions from tariffs imposed by the US had reinforced the need to cut interest rates.
"The rise in global tariffs and increase in policy uncertainty had adversely changed the outlook for growth in Australia's major trading partners," the minutes said.
However, a 0.25 per cent cut was agreed upon as being the most appropriate, given there were still risks inflation could kick off again.
The board said if global uncertainty weighed heavier than expected, interest rates would need to be cut even more than forecast.
"Monetary policy would need to move to an expansionary setting in the event these scenarios materialised," the minutes said.
The rates market has forecast the cash rate to drop to 3.1 per cent by the end of the year.
However, the central bank said it was not yet time to make a decision on whether a more aggressive approach to cutting interest rates was needed, with board members expressing a preference to "move cautiously and predictably".
In a speech to the Economic Society of Australia in Brisbane, RBA chief economist Sarah Hunter outlined some of the bank's thoughts on how Mr Trump's tariffs would impact the domestic economy.
She said the bank had identified the key transmission channels that would impact the Australian economy and determine the board's future monetary policy response.
Firstly, trade flows would be impacted. That could push down inflation in Australia as countries divert cheap goods from countries with tariff barriers. But a broader disruption to supply chains could also result in prices rising.
The tariffs will also weigh on economic growth, as uncertainty causes businesses and to a lesser extent households to delay spending decisions.
Much will depend, though, on which direction US authorities go from here. Markets have been supported by their assumption that Trump Always Chickens Out.
If the US president lashes out to disprove this theory, markets could be in for a drastic re-pricing, which could further impact households' and businesses' decision-making.
How the rest of the world responds will also affect the economic fallout. Governments could provide fiscal support to boost ailing economies, with much hinging on the response of the Chinese administration, given the nation's outsized influence on Australian trade.
Central banks, including the RBA, will also have a role to play in dampening the economic shock through easing interest rates.
"So how will the current unpredictable and uncertain global environment transmit through to the Australian economy? The short answer is we can't be completely sure," Ms Hunter said.
The RBA will continue to monitor all these factors and adjust the assumptions that drive its monetary policy decision-making accordingly, she said.
How Australia's economy stacks up against other allies will be revealed when the OECD releases its global economic outlook on Tuesday.
The outlook comes a day before the release of data on the domestic economy's performance in the first three months of 2025.
Economists tip Wednesday's gross domestic product numbers for the March quarter will show the economy expanded by up to 0.5 per cent.
Minutes from the last Reserve Bank board meeting reveal why they came close to an unusually large cut, as the bank's chief economist outlines how they think Donald Trump's tariffs could hit the domestic economy.
The minutes from the bank's May meeting were released on Tuesday, shedding light on its decision to cut the cash rate by 25 basis points to 3.85 per cent.
The Reserve Bank considered an even larger reduction of 50 basis points at the meeting, due to uncertainty in global markets.
Bank board members said developments in the domestic economy alone, with slowing inflation and weak consumption growth, warranted a 25 basis point cut.
Repercussions from tariffs imposed by the US had reinforced the need to cut interest rates.
"The rise in global tariffs and increase in policy uncertainty had adversely changed the outlook for growth in Australia's major trading partners," the minutes said.
However, a 0.25 per cent cut was agreed upon as being the most appropriate, given there were still risks inflation could kick off again.
The board said if global uncertainty weighed heavier than expected, interest rates would need to be cut even more than forecast.
"Monetary policy would need to move to an expansionary setting in the event these scenarios materialised," the minutes said.
The rates market has forecast the cash rate to drop to 3.1 per cent by the end of the year.
However, the central bank said it was not yet time to make a decision on whether a more aggressive approach to cutting interest rates was needed, with board members expressing a preference to "move cautiously and predictably".
In a speech to the Economic Society of Australia in Brisbane, RBA chief economist Sarah Hunter outlined some of the bank's thoughts on how Mr Trump's tariffs would impact the domestic economy.
She said the bank had identified the key transmission channels that would impact the Australian economy and determine the board's future monetary policy response.
Firstly, trade flows would be impacted. That could push down inflation in Australia as countries divert cheap goods from countries with tariff barriers. But a broader disruption to supply chains could also result in prices rising.
The tariffs will also weigh on economic growth, as uncertainty causes businesses and to a lesser extent households to delay spending decisions.
Much will depend, though, on which direction US authorities go from here. Markets have been supported by their assumption that Trump Always Chickens Out.
If the US president lashes out to disprove this theory, markets could be in for a drastic re-pricing, which could further impact households' and businesses' decision-making.
How the rest of the world responds will also affect the economic fallout. Governments could provide fiscal support to boost ailing economies, with much hinging on the response of the Chinese administration, given the nation's outsized influence on Australian trade.
Central banks, including the RBA, will also have a role to play in dampening the economic shock through easing interest rates.
"So how will the current unpredictable and uncertain global environment transmit through to the Australian economy? The short answer is we can't be completely sure," Ms Hunter said.
The RBA will continue to monitor all these factors and adjust the assumptions that drive its monetary policy decision-making accordingly, she said.
How Australia's economy stacks up against other allies will be revealed when the OECD releases its global economic outlook on Tuesday.
The outlook comes a day before the release of data on the domestic economy's performance in the first three months of 2025.
Economists tip Wednesday's gross domestic product numbers for the March quarter will show the economy expanded by up to 0.5 per cent.
Minutes from the last Reserve Bank board meeting reveal why they came close to an unusually large cut, as the bank's chief economist outlines how they think Donald Trump's tariffs could hit the domestic economy.
The minutes from the bank's May meeting were released on Tuesday, shedding light on its decision to cut the cash rate by 25 basis points to 3.85 per cent.
The Reserve Bank considered an even larger reduction of 50 basis points at the meeting, due to uncertainty in global markets.
Bank board members said developments in the domestic economy alone, with slowing inflation and weak consumption growth, warranted a 25 basis point cut.
Repercussions from tariffs imposed by the US had reinforced the need to cut interest rates.
"The rise in global tariffs and increase in policy uncertainty had adversely changed the outlook for growth in Australia's major trading partners," the minutes said.
However, a 0.25 per cent cut was agreed upon as being the most appropriate, given there were still risks inflation could kick off again.
The board said if global uncertainty weighed heavier than expected, interest rates would need to be cut even more than forecast.
"Monetary policy would need to move to an expansionary setting in the event these scenarios materialised," the minutes said.
The rates market has forecast the cash rate to drop to 3.1 per cent by the end of the year.
However, the central bank said it was not yet time to make a decision on whether a more aggressive approach to cutting interest rates was needed, with board members expressing a preference to "move cautiously and predictably".
In a speech to the Economic Society of Australia in Brisbane, RBA chief economist Sarah Hunter outlined some of the bank's thoughts on how Mr Trump's tariffs would impact the domestic economy.
She said the bank had identified the key transmission channels that would impact the Australian economy and determine the board's future monetary policy response.
Firstly, trade flows would be impacted. That could push down inflation in Australia as countries divert cheap goods from countries with tariff barriers. But a broader disruption to supply chains could also result in prices rising.
The tariffs will also weigh on economic growth, as uncertainty causes businesses and to a lesser extent households to delay spending decisions.
Much will depend, though, on which direction US authorities go from here. Markets have been supported by their assumption that Trump Always Chickens Out.
If the US president lashes out to disprove this theory, markets could be in for a drastic re-pricing, which could further impact households' and businesses' decision-making.
How the rest of the world responds will also affect the economic fallout. Governments could provide fiscal support to boost ailing economies, with much hinging on the response of the Chinese administration, given the nation's outsized influence on Australian trade.
Central banks, including the RBA, will also have a role to play in dampening the economic shock through easing interest rates.
"So how will the current unpredictable and uncertain global environment transmit through to the Australian economy? The short answer is we can't be completely sure," Ms Hunter said.
The RBA will continue to monitor all these factors and adjust the assumptions that drive its monetary policy decision-making accordingly, she said.
How Australia's economy stacks up against other allies will be revealed when the OECD releases its global economic outlook on Tuesday.
The outlook comes a day before the release of data on the domestic economy's performance in the first three months of 2025.
Economists tip Wednesday's gross domestic product numbers for the March quarter will show the economy expanded by up to 0.5 per cent.