The Reserve Bank of Australia (RBA) may cut interest rates to shield the Australian economy if Donald Trump’s looming global trade war stifles growth.
RBA Governor Michele Bullock addressed the potential rate cuts during a press conference in Sydney on Tuesday, following the board’s decision to keep the official cash rate at 4.1 per cent.
Bullock highlighted that the RBA has room to manoeuvre should global economic conditions worsen.
“When we went into the pandemic, interest rates were about 1.5 per cent,” she said. “They’re now much higher than that.”
“If it turns out that there is a big growth impact on Australia, we do have room to move the exchange rate to support. Now, it does depend on what happens.”
Lower interest rates generally encourage economic growth by making borrowing cheaper, stimulating investment and spending.
Global Uncertainty and Trump’s Tariff Plans
Bullock’s comments come as central banks worldwide assess the impact of Trump’s aggressive trade policies. The former US President has promised that his new tariff plan, set to be announced on April 2, will apply to all nations, despite speculation that only 10 to 15 countries might be affected.
So far, Trump has slapped tariffs on aluminium, steel, and the automotive sector, with further increases on Chinese imports. Additional tariffs on Canada and Mexico are set to take effect early next week.
While Australia is in a strong position with falling inflation and low unemployment, Bullock warned that a scenario of slowing growth alongside rising inflation—known as ‘stagflation’—would be tough to manage.
“If growth slows but inflation picks up … then we’re in a slightly difficult world,” she said.
Keeping an Eye on China
The RBA is closely watching how China, Australia’s biggest trading partner, responds to Trump’s tariffs. Bullock noted that Chinese authorities remain committed to their 5 per cent growth target, which could help cushion Australia from the worst effects of a trade war.
“Our scenario analysis suggests that if China continues on that path, then yes, there will be an impact on us in terms of growth,” Bullock said. “But it’s not going to be as big as some other countries might suffer.”
Inflation and the Path Forward
Despite the uncertainty, Bullock said the RBA is becoming “gradually more confident” about bringing inflation back to the target range of 2-3 per cent.
“We haven’t got 100 per cent confidence, but if you look at our forecasts and how inflation is tracking, we’re actually doing pretty well,” she said.
The board also noted that while Trump’s tariffs are causing global uncertainty, there is no sign yet of their impact on Australian inflation. The RBA will “watch and wait” before making any decisions.
What’s Next for Interest Rates?
Independent economist Saul Eslake believes the RBA will wait for more data on inflation and employment, expected at the end of April, before making a move.
AMP Chief Economist Shane Oliver added that a rate cut before the federal election is unlikely. “The RBA is in a cautious mode. Back in February when they cut, they made it clear they were wary of cutting again,” he said.
The RBA last reduced the cash rate in February, dropping it from 4.35 to 4.10 per cent. Bullock has urged mortgage holders to be patient, acknowledging the financial strain many Australians are facing.
“I understand you are hurting, and I understand mortgage rates have increased a lot … but we need to get inflation down because that is the other thing that is really hurting you,” she said.
“If we don’t get inflation down, interest rates won’t come down, and you’ll be stuck with inflation and high interest rates.”
For now, all eyes are on the global economy, Trump’s trade war, and how Australia navigates the uncertainty ahead.
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Mitchell
Mitchell is a seasoned Ph.D. scholar with extensive expertise gained through years of rigorous research, publication, and teaching experience. He brings a wealth of knowledge and analytical skills to tackle complex academic challenges. His work is dedicated to delivering innovative solutions, advancing knowledge, and promoting academic excellence. Proficient in research methodology, data analysis, and scholarly writing, Mitchell has contributed to peer-reviewed journals and mentored students to achieve academic success.
