Cost-of-living warning no one wants to hear as Trump’s tariffs wreak havoc on the Aussie dollar
The Reserve Bank has warned Donald Trump’s tariffs could weaken the Australian dollar and push up inflation.
Interest rates were left on hold at 4.1 per cent on April 1 but the minutes of that meeting warned borrowers against expecting deep rate cuts in the wake of financial market turmoil.
‘Weaker global demand and the possibility of trade diversion away from the United States could reduce inflation in Australia, but a larger exchange rate depreciation or more substantial global supply disruptions could increase inflation,’ it said.
The Australian dollar last week fell to 59 US cents for the first time since the start of the Covid pandemic in March 2020, but it has since recovered to 63 US cents.
A weaker Australian dollar makes overseas holidays and imports like clothing and electronics more expensive.
But a sharp increase in imports from China, and other Asian nations seeking new markets to avoid prohibitive US tariffs, could also temporarily bring down Australian inflation.
The currency’s rollercoaster fortunes are tied to global financial market risk appetite, and plunged last week as the Australian share market lost 6.4 per cent at one point of early trade, wiping almost $180billion from equity investments.
The futures market is now expecting the RBA to cut rates by another 125 basis points by the end of 2025, which would take the cash rate down to 2.85 per cent for the first time since December 2022.
The Reserve Bank has warned Donald Trump ‘s tariffs could weaken the Australian dollar and push up inflation (pictured is Governor Michele Bullock)
Traders and NAB economists are expecting a super-sized 50 basis point rate cut on May 20.
Despite those forecasts, the Reserve Bank has warned home borrowers not to expect such deep cuts as they risk pushing up already very high house prices and increasing mortgage debt levels.
‘Looking further ahead, members noted that the RBA and other regulators were attentive to vulnerabilities that might build in the financial system if households responded to an actual or anticipated easing in financial conditions by taking on excessive debt,’ the minutes said.
‘While lending standards were currently sound, historical experience both in Australia and abroad suggested that periods of lower interest rates can coincide with riskier borrowing activity, a rapid increase in house prices and, at times, a relaxation of lending standards.’
The Coalition is campaigning to relax lending rules and wants the banking regulator to review its existing lending standards, based on whether a potential borrower can cope with a three percentage point rise in variable mortgage rates.
The RBA minutes suggested the Reserve Bank’s monetary policy board would refrain from rushing to cut interest rates.
‘Members emphasised the need to be cautious and alert to the evolving economic outlook, and the importance of future decisions being guided by the incoming information and the assessment of risks,’ the minutes said.
Australia’s headline inflation rate of 2.4 per cent in 2024 was on the lower side of the Reserve Bank’s 2 to 3 per cent target.
Interest rates were left on hold at 4.1 per cent on April 1 but the minutes of that RBA meeting warned borrowers against expecting deep rate cuts in the wake of financial market turmoil (pictured is US President Donald Trump)
But the true level was 3.2 per cent once you subtracted the federal government’s $75 quarterly electricity rebates, which are being extended until the end of 2025.
While Trump has placed a 90-day pause on imposing tariffs on most countries while negotiations take place, the US and China are still engaged in a trade war.
The US has slapped 145 per cent tariffs on China and China has responded by imposing 125 per cent duties on American imports.
The trade barriers could weaken China’s manufacturing activity, and see demand fall for iron ore, which is used to make steel and is Australia’s biggest export to that country.
The Reserve Bank fears weaker global growth could hit Australia, regardless of whether 10 per cent tariffs are reinstated on Australian exports to the US.
A decline in global trade could potentially make Australian firms less willing to invest and hire new staff as business confidence falls.
‘Regarding risks to the outlook for the global economy, members noted that these had increased and were tilted to the downside,’ the Reserve Bank minutes said.
‘They agreed that a significant further increase in global tariffs or other trade restrictions could materially disrupt global trade.
‘Uncertainty about global economic policy settings could also lead firms and households to reduce spending and investment.
‘If either of those consequences were to transpire, global economic activity could fall significantly, though the implications for inflation would be more complicated.’
