US tariffs prompt cash rate forecast change
The US’s tariffs have shifted expectations of rate cuts in Australia ahead of incoming global effects.
In the wake of US President Donald Trump’s “Liberation Day” tariffs, major bank ANZ’s economics team have announced that they now expect the Reserve Bank of Australia (RBA) to cut rates by 0.25 per cent in May, July and August, leaving the cash rate at 3.35 per cent.
On 3 April, Australia had a 10 per cent minimum baseline tariff imposed (set to come into effect on 5 April), along with a multitude of other countries such as China, Japan, Canada, India, South Korea, Cambodia as well as the EU.
ANZ now joins the other three major banks expecting four rate cuts this year (at the time of writing), which would leave the cash rate at 3.35 per cent by December 2025.
ANZ’s economics team noted that the US is not a substantial buyer of Australian exports, however, there may be “sectoral impacts from tariffs”.
They stated the bigger risks for our economy revolve around the “implications for global growth and domestic consumer and business confidence”.
While the tariff impositions are still being digested, the following weeks should provide more clarity on the scope for negotiations and potential retaliations from US trading partners, according to the economics team.
“[Based] on the information we have to hand, the market reaction and past RBA responses to global shocks, more aggressive RBA easing now seems more likely than not,” ANZ stated.
“Indeed, we would not rule out a 50bp cut in May, if sentiment sours and the global growth outlook deteriorates sufficiently. While the RBA does not target market sentiment, the chart below makes the point that conditions that give rise to negative market sentiment often see RBA easing.”
According to ANZ, further easing from the RBA would offset much of the risk that a deterioration in confidence flows through to weaker consumer spending and business investment.
“So, our broader GDP growth, unemployment and inflation forecasts will be little impacted. Rather, the cash rate (and potentially the AUD) will make the adjustment to limit the impact on the real economy.”
CBA senior economist, Belinda Allen, further noted the April Statement on Monetary Policy (SoMP) stating that any widening in the scope of tariffs will harm confidence, amplify economic uncertainty and adversely impact global activity.
“The board indicated the potential upside or downside risks to inflation, dependent on the response of other nation’s governments and central banks.
“However, the Board did specify that ‘monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation’,” she added.
Bendigo Bank’s chief economist, David Robertson, noted the RBA’s assessment of uncertainty around the consequences of the tariffs makes the job of setting the cash rate more complex.
“Australia is one of the least exposed to tariffs directly, given less than 5 per cent of our goods exports head to the USA. So, it will be indirectly, via our major trading partners, that we are likely to be most impacted.
“Conversely, will global demand slow down sharply, meaning all the more need for RBA rate cuts? Recent forecasts from the RBA and the OECD do show slower growth ahead in the US and to a lesser extent the global economy, but not at this stage a slowdown for our major trading partners,” Robertson said.
“This will be a key variable for the rest of the year, and will depend on the degree to which countries retaliate to US tariffs, or perhaps seek more reliable trade partners elsewhere.”
HSBC chief economist Paul Bloxham, citing the RBA’s “cautious directional guidance” following the April meeting, said it was “unsurprising that the central bank was circumspect”.
“The effect of the global shock is also already impacting local household wealth through a high exposure to global equities via households' superannuation savings.
“As a result, we see the RBA cutting by 25bp at its next meeting in May (previously July) and following this up with three more cuts over subsequent quarters taking the cash rate to 3.10 per cent by early 2026 (previously we saw it falling to 3.60 per cent by then).
“A domestic economy that is still close to full employment is the key risk that keeps the RBA from cutting by more, or faster. We see this risk as likely to mean the central bank will wait to get quarterly inflation readings before each easing,” Bloxham said.
