Further rate relief expected as US tariffs tank global markets

All four of Australia's major banks now expect the RBA to cut interest rates four times this year, after global financial markets were tanked by US President Donald Trump’s sweeping tariff announcements.

The S&P 500 lost $5 trillion in stock value in a sharp two-day decline following the ‘liberation day’ tariffs last Wednesday, sparking fears of a global recession.

“If we avoid retaliatory tariffs on US imports (as appears likely) and the $A remains stable, Trump's tariffs are more likely to hinder growth than boost inflation, supporting further RBA rate cuts,” AMP said in a market update on Friday.

ANZ updated its cash rate forecast on Friday, aligning it with the other major banks’ predictions that the RBA will cut interest rates three more times in 2025, which would see the cash rate fall to 3.35 per cent by the end of the year.

“Given the likely impact of the tariffs on global growth, as well as those already evident on markets, ANZ Research expects the RBA to lower the official cash rate in May, July and August, by 25 basis points at each meeting,” ANZ said in a release.

“The bigger risks for the Australian economy centre around the implications for global growth and both domestic consumer and business confidence.”

The global trade war could have mixed impacts on inflation in Australia, head economist at Oxford Economics Australia Ben Udy told Accounting Times.

“There's two sort-of offsetting impacts. The first is that supply chains are significantly disrupted. That's likely to put upwards pressure on prices,” he said.

As companies relocate their factories and rearrange supply chains in response to the tariffs, they would incur costs which would result in higher prices for consumers, he said.

On the other hand, reduced demand for goods in the US due to higher import costs and an economic slowdown would inject surplus goods into the global market, putting downward pressure on prices.

“Those things that the US has stopped buying will now be floating around in the global market. And so Australia may be able to get cheap imports of some stuff that the US has stopped buying. So that might put some downward pressure on import prices,” Udy said.

Economists appear to be betting that the deflationary impacts of the tariffs would outweigh any upwards inflation pressure. Almost three-quarters (29 out of 40) of economists polled by The Australian Financial Review forecast that the RBA would lower the cash rate to 3.85 per cent in May.

The US tariffs are unlikely to have strong direct impacts on Australia’s economy, as the US only comprised 5.4 per cent of Australia’s total exports in 2024, according to COMTRADE.

However, Australia’s exposure to the Chinese market, which made up 37 per cent of its exports, would pose a greater risk as the US and China engage in a tit-for-tat trade war.

The US has levied 54 per cent tariffs on China following ‘liberation day’ additions, and China responded with a 34 per cent tariff on US goods.

The Australian dollar fell sharply to 60 US cents on Monday, deeper than the COVID-19 pandemic lows amid fears of an economic slowdown in China.

However, economists have said that China would likely offset the impacts of the US trade war with domestic stimulus, meaning their demand for Australian commodities may not be severely cut.

“China and Asia have considerable capacity to offset the negative consequences of US trade policy in the short term through stimulus and by enticing private investment related to the region’s ongoing economic development,” Westpac said in an economic update.

“Into the medium-term, continued growth in the region’s population, industry and household incomes will deepen exposed nations’ export markets, reducing the significance of the US market to the world. Australia is well positioned to benefit from this growth and economic development.”

Udy echoed this sentiment: “I think China is likely to offset a lot of the impact of these tariffs with stimulus domestically, reducing the drag on the economy from these tariffs.”

Data released by the Lowy Institute in January showed that 70 per cent of economies worldwide traded more with China than the US in 2023. This contrasted with 2001 levels, where 80 per cent of countries traded more with the US than China.

“China’s lead over the United States in international trade relationships has only widened since the last US–China trade war of 2018–19,” the Lowy Institute found.

The impacts a worldwide trade war would have on Australia’s economy are difficult to predict, stoking significant uncertainty. However, economists have projected that the RBA would respond with further monetary easing to mitigate risks posed by a global economic slowdown.

“We were already expecting another cut in August and then February taking the cash rate to 3.6%, but there is now a good chance we will see another one or two cuts on top of this as a result of the threat to growth posed by Trump’s tariffs,” AMP said.

“More rate cuts than otherwise might be the silver lining in the Trump cloud for Australians with a mortgage.”