Tariffs to force 4 rate cuts in 2025

According to the Australian Financial Review (4 April 2025), “Markets are increasingly confident the Reserve Bank of Australia (RBA) will cut the cash rate in May and up to another three times after that, as economists predict US President Donald Trump’s tariffs will cause a global slowdown that will spill over to the Australian economy”.

While economists generally agree the “direct” impact of the new tariffs on Australia will be small, the "indirect" impact could be a problem, depending on how they disrupt trading patterns and damage global growth (abc.net.au, 4 April 2025).

In these new conditions, economists expect the RBA to shift its attention from away from inflation and towards shoring up growth.

At a press conference in Sydney following The Board’s decision to hold the official cash rate at 4.1 per cent, RBA Governor Michele Bullock indicated there was room for potential defensive measures, flagging possibility of rate cuts as central bankers across the world tried to gauge the impact of the US tariffs on global growth and inflation (news.com, 4 April 2025).

Although still cautious about inflation and adopting her usual ‘watch and wait and see what happens’ stance, financial market are more confident about the chance of rate cuts sooner rather than later.

Prior to that recent meeting, when the RBA kept interest rates on hold, financial markets had priced a May rate cut at 70 per cent. Since then, having considered Bullock’s statement, and after the Trump Tariff Plan was announced, that has jumped to a 90 per cent chance. Pricing in markets further suggests there will be another rate cut by August, and the possibility of a third by November (abc.net.au, 4 April 2025).

Prior to the tariff announcement, inflation in Australia was under control and within the RBA target, and it was widely agreed the recent February cut was the beginning of a modest interest rate easing cycle. Despite market predictions, it’s still somewhat uncertain how far interest rates might be reduced. However, it’s expected that any rate cuts, when they happen, will be passed on to home mortgages and other lending immediately.

If you’d like to discuss these matters in relation to your current loan or proposed lending, don’t hesitate to get in touch with our office.