Global Tariff War Drives RBA Rate Cut as More Reductions Loom
Escalating global trade tensions and volatile U.S. tariff policies drove the Reserve Bank of Australia to cut interest rates Tuesday, with central bank officials signaling more reductions could follow if the trade war deepens.
The RBA lowered its cash rate by 25 basis points to 3.85%, marking the first reduction since February as policymakers responded to what they described as "unusually uncertain" global conditions stemming from higher-than-expected U.S. tariffs on Chinese imports.
The April 2 tariff announcements, which prompted swift Chinese retaliation, sent financial markets into turmoil and forced the RBA to reassess Australia's economic outlook given the nation's heavy reliance on trade with both superpowers.
"Global developments since the previous meeting strengthened the case for a reduction in the cash rate target," according to meeting minutes released Tuesday. Board members noted that tariff levels remain "well above previous levels and future tariff decisions remained highly unpredictable."
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The central bank's baseline forecast now assumes tariffs will stay around current elevated levels while policy uncertainty gradually declines but remains high. However, officials outlined scenarios where further trade escalation could trigger more aggressive monetary easing.
"Monetary policy would need to move to an expansionary setting in the event these scenarios materialised," the minutes stated, referring to adverse scenarios involving much higher permanent tariffs that could cause sharp falls in global growth and asset prices.
Market volatility following the tariff announcements reached levels "only exceeded in recent decades during the global financial crisis and the early days of the COVID-19 pandemic," according to the RBA. Expected volatility spiked as equity prices, bond yields and commodity prices initially plunged before partially recovering.
The Australian dollar whipsawed during the period, depreciating sharply in early April before rebounding, reflecting the nation's vulnerability to disruptions in global trade flows. Australia sends about one-third of its exports to China while maintaining strong economic ties with the United States.
RBA Governor Michele Bullock and board members considered implementing a larger 50 basis point cut but ultimately chose the measured approach while keeping the door open for faster easing if trade tensions worsen.
"Members observed that there were also downside risks to the outlook stemming from the domestic economy," the minutes showed. "The combination of these might therefore warrant a 50 basis point reduction at this meeting."
Market pricing now expects around three quarter-point reductions throughout 2025, with traders anticipating the RBA will need to provide more stimulus if the trade war intensifies. Financial markets had "moved markedly lower for a time in early April" before partially recovering as some tariff measures were paused.
The central bank's growth forecasts for Australia's major trading partners have deteriorated, with the largest downgrades affecting countries with high reliance on goods trade. While China's outlook remained relatively stable due to expected policy stimulus, uncertainty around future tariff decisions continues to weigh on global prospects.
"It was challenging to predict how global trade policy would evolve, but most scenarios posed some downside risk to Australian activity and inflation," the minutes stated. Officials noted that some scenarios could see "significant" impacts on the domestic economy.
Board members acknowledged that tariffs could affect Australian inflation in competing ways. While weaker global demand and trade diversion might depress prices, disruption to complex supply chains could lift costs of traded goods globally.
The RBA emphasized it stands ready to respond more aggressively if needed. "Policy was well placed to respond decisively to international developments if they were to have material implications for activity and inflation," officials stated.
Chinese authorities have already eased monetary policy and indicated willingness to provide more fiscal stimulus, while European policymakers have signaled looser fiscal settings. The coordinated global response suggests central banks worldwide are preparing for prolonged trade disruption.
The tariff uncertainty has created additional challenges for Australian businesses and households. While survey measures of business and consumer sentiment showed little change initially, liaison contacts noted growing uncertainty about the international outlook.
"Most were not yet revising their investment or hiring decisions in response to global developments," the RBA noted, though officials warned this could change if trade tensions persist or escalate further.
The central bank affirmed its commitment to both price stability and full employment, stating it "will do what it considers necessary to achieve that outcome" as global trade dynamics continue evolving.
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