One by one, economists are abandoning their interest rate forecasts for next month after US President Donald Trump upended financial markets with his “liberation day” tariffs.
Earlier this month, a dozen were tipping the Reserve Bank of Australia would keep rates on hold in May. Today, just four are sticking with that view.
Warren Hogan is the latest of the hawks to capitulate. The chief economist at Judo Bank has long argued against lowering borrowing costs because of still-elevated inflation at home, but he has joined the majority in tipping the RBA will cut rates in May because of the heightened uncertainty from the White House.
Trump’s erratic trade policies – that includes a 145 per cent tariff on China – have roiled global markets, wiping out trillions of dollars in equities globally as his constant back-and-forth decision-making casts a cloud over the global economic outlook.
Money markets are fully priced for a standard quarter of a point cut at the RBA’s next policy meeting on May 20 and are pricing in a 27 per cent chance of a jumbo half-a-point move.
“The impact on confidence and sentiment is strongly negative, and that could have a big impact on business and consumer spending,” Hogan said. He is forecasting two “insurance” rate cuts to hedge against the severity of the tariffs against Australia’s major trading partner, China.
“We’re caught right in the middle of this trade war between the world’s two biggest economies,” he said.
Sino-US trade tensions have escalated after Trump last week revealed his sweeping reciprocal tariffs, leading to tit-for-tat duties on each nation’s goods. The move prompted National Australia Bank to call for a supersized half-a-point reduction by the RBA next month.
“Higher barriers on US trade and elevated policy uncertainty put net downward pressure on both growth and inflation in Australia,” said Taylor Nugent, a senior markets economist at NAB. The lender is the only forecaster to call for such a large reduction.
Holding their nerve
Even so, economists at PinPoint Macro Analytics, Macroeconomics Advisory, Morgans Financial and KPMG are not convinced the central bank will move an inch. They cite the prevailing uncertainty as a reason to keep rates at 4.1 per cent. Just as importantly, they are unsure about the path of inflation at home.
“Governor Michele Bullock last week showed she was in no rush to cut interest rates,” noted Michael Blythe, former chief economist at Commonwealth Bank and now co-founder of PinPoint.
Indeed, Bullock called for patience as policymakers assess how the new US tariff regime could alter global demand and supply. The central bank kept the cash rate on hold just one day before Trump’s April 2 tariff announcement.
That’s after the RBA cut the cash rate in February for the first time in nearly five years because inflation had markedly slowed. Money markets now expect a total of 120 basis points of reductions by Christmas, twice the amount it had anticipated before “liberation day”. This would be equivalent to nearly five quarter-point cuts.
Economists are awaiting Australia’s crucial first-quarter consumer price index report on April 30. Consensus is for the data to show further progress on price growth after trimmed mean inflation, the RBA’s preferred measure, slowed to 3.2 per cent in the December quarter.
But Trump’s tariffs are clouding the inflation outlook. Some argue that the hefty duties will push prices higher globally, while others say the rerouting of goods away from the US to countries that do not have tariffs will be dis-inflationary.
In the minutes of the April meeting released on Tuesday, the RBA noted it was cautious about the economic outlook and that the May meeting would be an “opportune time” to revisit the monetary policy setting. By then, it said it would have additional data on the job market and inflation as well as more information about the likely evolution of global trade policies.
“Collectively, this information would have a considerable bearing on their decision,” it said.
Yet, KPMG chief economist Brendan Rynne stressed that even in the worst-case scenario of lofty and permanent US tariffs, the impact of the trade war on the Australian economy would be relatively small.
“This small decline in GDP – while incredibly unhelpful and unnecessary – means there is no need for emergency fiscal or monetary policy responses (at this stage),” he said.
Michael Knox, chief economist at Morgans Financial, highlighted that the unstable international environment and 130 countries negotiating trade terms with the US meant it was too early to tell what the impact would be.
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