The Trump cloud hanging over the RBA
News report: The Reserve Bank has cut interest rates as expected by 25 basis points, taking the cash rate down from 4.1% to 3.85%.
Michele Bullock, RBA Governor: So the cautious approach we have taken has got us to this point where inflation is now below 3% and employment is holding up. But now we've got inflation down, we must keep it there while trying to maintain a healthy jobs market. So there's now a new set of challenges facing the economy.
Sam Hawley: Ian, this was a rate cut we were expecting, so it's not a surprise, but it's really welcome news for a lot of people, isn't it?
Ian Verrender: Yeah, absolutely. I mean, you know, we had what, 13 rate rises on the hop, but a couple of those were double rate rises. It's extraordinary that we didn't see a lot of households go under and that there weren't as many forced house sales as we would have expected. And I think that really got down to the fact that unemployment didn't really rise to the extent that everybody thought. So people maintained their jobs. And if you've got a job and you've got a big mortgage, pretty much what we've discovered over the years is that people do anything to keep that roof over their head.
Sam Hawley: So the RBA has, of course, dropped rates again. Just tell me before we move on, though, some of the banks are faster at passing on this cut. So Westpac, for instance, I read, it's going to wait until June the 3rd, while Macquarie, it will pass it on by May the 23rd. So just explain that for me. What is that all about?
Ian Verrender: Look, I'll tell you what, this is a much quicker pass through than we've traditionally seen. In the past, we've seen banks hold off on actually passing them through for about two to three months sometimes. And so they'll announce it and say, yes, we're putting through the rate cut, but don't expect it next week. So this is actually pretty quick. There's been a bit of a change in the dynamic in terms of competition within the banking sector. And a lot of that, I think, has to do with the fact that Macquarie has really come into that mortgage market and that consumer market and upset the big four apple cart.
Sam Hawley: Oh, yes. OK. So a bit of pressure on the big four from Macquarie. Well, that's always good. All right. So, Ian, Michele Bullock, the RBA governor, says the bank actually did consider dropping rates by 50 basis points. Of course, they settled on a smaller cut.
Michele Bullock, RBA Governor: There was a bit of a discussion about hold, and that was sort of put aside pretty quickly. The discussion then was about a cut and how big. And there was a discussion about 50 and 25. The board was of the view that 25 was the right number on this occasion.
Sam Hawley: So why is that? How did she explain that?
Ian Verrender: Look, that's a really interesting point. And if you hark back to February when the Reserve Bank made its first cut to interest rates in this cycle, it was very guarded language from Michele Bullock, the Reserve Bank governor. She was essentially saying this decision wasn't a Lay down misí¨re. It wasn't that we're all piling on and say, let's cut rates now. We argued about it. So it was a do we or don't we cut and don't expect too much in the future because we've just done this now to kind of ease the pain a little bit. This time around, it's, well, we didn't just discuss one cut. We discussed two. I mean, it was a unanimous decision to do the one, but all of that caution that was being expressed just a few months ago has been jettisoned. And it's now the discussion is, well, we're going to cut, but the only question is by how much. And then there was also a mention even in the statement about the Reserve Bank essentially modelling what might happen in the event of a severe global economic meltdown and whether or not the Reserve Bank would be able to cope with it, which they say they can.
Michele Bullock, RBA Governor: If you look at our scenario analysis, it does suggest that in a really bad outcome, there could possibly be a recession. Yes. But that's in the very extreme circumstance. And again, it was to try and give ourselves some sort of spectrum of outcomes that we might be at. At the moment, we're not looking at that, but we need to be alert.
Sam Hawley: And that brings us to Donald Trump in a moment. Let's not go there just yet, though. What about the unemployment rate and wage growth? What role did they play in this decision?
Ian Verrender: I don't think it played a great deal at all. You know, for right through that period when we saw rate hikes, there was a lot of commentary from economists and from the business press that, you know, the labour market's too tight. What we're going to see is a blowout in wages. And it just didn't happen. And I think everybody overlooked the fact that the wages system in Australia has changed dramatically from the 70s, 80s and 90s when we did see a lot of wage blowouts because the industrial relations system now bans essentially taking action, you know, going on strike. And so the power of the unions to force through wage rises has been very much diminished. So, OK, we did see some pretty strong employment numbers and we've seen strong employment numbers right through this cycle, which has been highly unusual and almost unprecedented. So I don't think the Reserve Bank is all that concerned about the fact that there's a strong jobs market. And I think in many ways they see it as reason to celebrate.
Sam Hawley: All right. But the Reserve Bank is concerned about that rather large elephant in the room. Sorry. I don't know if it's a large elephant, but anyway, there's an elephant in the room and it's Donald Trump, of course. Michele Bullock said she was actually shocked initially at just how far the US president went with his initial tariffs.
Michele Bullock, RBA Governor: Us, just like everyone else, was completely blown out of the water by the scale and the scope.
Sam Hawley: But how is she feeling about it now?
Ian Verrender: I think they're extremely concerned. I mean, everyone seems to have, you know, wound back the fear factor, you know, "they're only going to impose 30 per cent tariffs on China. That's so good." Well, actually, it's a really big impost if it continues on. It will have a major impact on the global economy. Okay. It's a lot less than 145 per cent. But at 145 per cent, you're essentially not trading. So that's basically, you know, you've shut down trade between America and China if you have that kind of level of tariff. But at 30 per cent, I mean, you're talking about a serious inflationary boost in America.
Sam Hawley: But how are these tariffs inflationary for us?
Ian Verrender: Well, you know, America is the world's biggest economy. You are going to see Americans having to pay a lot more for goods that come in from China and from Mexico and Canada and everywhere else from around the world. That means Americans are going to have to pay more. America is also the centre of global money markets. This is where money is. It's the biggest player in global money markets because it is the reserve currency. And so it has an impact on interest rates worldwide. The other possible factor is that if these tariffs result in supply chain disruptions and you see that there are shortages around the world in particular goods, you're going to see price rises as a result of that.
Sam Hawley: So is Michele Bullock still concerned, even though the tariffs have been dropped, as you say, to 30 per cent on China, that that is still high enough to push the global economy into recession and the Australian economy into recession?
Ian Verrender: Yeah, I think so. I mean, she was, first up, as you said, she was expressing shock at the level of the tariffs that Trump imposed. I don't think she's in any way comfortable with the current situation and particularly given that it's really only a temporary freeze. The global situation is that all countries are paying 10 per cent at the moment. China's paying 30 per cent. The 10 per cent tariffs could be raised within the space of about six weeks. And China's, the freeze on the China tariffs lasts probably another two and a half months or so. So this is all very temporary and it all could blow out one more time. And one thing that I think all the commentators have overlooked, the inflationary impact from tariffs just not really talked about. And I think it's actually quite important to think about what impact that might have. And particularly given the US President Donald Trump has announced that his big, beautiful bill will incorporate a massive spend on defence with this Golden Dome.
Donald Trump, US President: Once fully constructed, the Golden Dome will be capable of intercepting missiles, even if they are launched from other sides of the world and even if they are launched from space.
Ian Verrender: So what you're looking at is a huge blowout in the US budget deficit. That deficit needs to be financed, which will require a lot of money needing to be raised at higher interest rates. So it's called stagflation, obviously, where you've got higher inflation and higher interest rates and lower growth, which require lower interest rates.
Sam Hawley: And it's a real balancing act for the RBA, I assume, because it has no idea what Donald Trump will do next. So what does that mean for more rate cuts?
Ian Verrender: I don't think Donald Trump knows what Donald Trump's going to do next, really. I'd say that's probably right. Look, what it means for more rate cuts, I think the immediate challenge is going to be slower growth. And so what the Reserve Bank is saying is, look, we've still got interest rates, official interest rates at a little under 4%, 3.85%. So that gives us plenty of ammunition at the moment to be able to cut rates to deal with any slowdown in growth. Where it could get complicated is if we get that stagflation impact globally, where you've got, lower growth, but higher inflation, what do you do then? If you raise interest rates to try and deal with the higher inflation, you kill off your growth. If you cut rates to try and boost growth, you fuel the inflation. So that's where it could get really tricky for them. But I think they're seeing at the moment that we're fairly well placed in terms of the ammunition we have to be able to deal with the growth problem. And that is probably another reason why they didn't do a double cut, because they want to keep rates in reserve. Plenty of ammunition there to be able to fight the growth battle.
Sam Hawley: All right. Okay. Well, Ian, we've had now, of course, two rate cuts. The last time the cash rate was below 4% was in May 2023. It seems like a long time ago now. Anyway, but this, it all does have a flow on effect here, doesn't it? Including on house prices.
Ian Verrender: Yeah, that's one of the big, I guess, issues that the Reserve Bank would also be looking at, because every time you go into a rate cutting cycle, you boost housing prices. That's one thing the Reserve Bank will be keeping a very close eye on.
Michele Bullock, RBA Governor: I acknowledge that some people are worried that as interest rates come down, housing prices will rise. But other policies have really got to step up here and address what is a housing shortage.
Sam Hawley: All right. Well, Ian, what do you think? How many more rate cuts should we now expect this year and how quickly could they come?
Ian Verrender: I think at this stage, it's pretty reasonable to suggest that we will get two this year. That's just based on, let's forget about the international situation, forget about Donald Trump. Let's just look at the domestic economy here. We've got inflation that is now down into that target zone and particularly underlying inflation. The Reserve Bank expects that to come down into the middle of that 2 to 3 percent band. That's the sweet spot. So you can kind of say that, you know, raise the flag and go, we've beaten inflation. So that's reason enough to bring interest rates down on their own. If you also add into that the lower growth prospects, that's a doubling in the reasons why you'd want to, you know, cut interest rates. So I think it's pretty reasonable to assume we'll have two more this year and probably another two in the new year, in 2026.
Sam Hawley: Ian Verrender is the ABC's Chief Business Correspondent. This episode was produced by Sydney Pead. Audio production by Sam Dunn. Our supervising producer is David Coady. I'm Sam Hawley. Thanks for listening.
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