Bullock hoses down hopes of deep interest rate cuts after Trump upheaval

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Reserve Bank governor Michele Bullock has tempered growing expectations of deep cuts in official interest rates to protect the economy and jobs market from the fallout from Donald Trump’s tariff war while warning of ongoing global unpredictability.

After the ASX200 added $99 billion in value following Trump’s decision to pause his reciprocal tariffs on most of America’s trading partners, Bullock altered a prepared speech to ask for patience to understand the ramifications on the global economy from one of the most tumultuous weeks in generations.

Donald Trump said he had been considering his tariff pause for some time.Credit: AP

The turmoil caused by Trump has dramatically altered market expectations of cuts in official interest rates. A fortnight ago, markets had expected the Reserve – which meets next on May 19-20 – to deliver two cuts through the rest of the year.

By Wednesday evening, this had shifted to 1.25 percentage points worth of cuts. On a $600,000 mortgage, the cumulative reduction in interest rates would reduce monthly repayments by almost $500.

But after Trump put his tariff plans on pause for 90 days, markets wound back expectations for the rest of the year, pricing in a full percentage point reduction in the cash rate, currently 4.1 per cent. A 0.25 percentage point cut is expected at the May meeting.

RBA governor Michele Bullock says the Donald Trump’s tariffs have made interest rate decisions more difficult.Credit: Renee Nowytarger

Bullock, in a speech to Chief Executive Women in Melbourne on Thursday evening, said it was inevitable there would be a period of uncertainty and adjustment following the tariff announcements which meant ongoing “financial market and economic volatility”.

She said the bank was considering a range of factors, including the responses of Australia’s trade partners, counter-responses by the US, movement in the value of the Australian dollar and other financial markets.

“A key focus for us is how all this uncertainty is affecting decisions made by households and businesses in Australia,” she said.

“There are a lot of moving parts. We are bringing all this together to form an objective assessment of what it means for the outlook for domestic activity and inflation here at home.

“We are mindful of not adding to the uncertainty, and to that end, it’s too early for us to determine what the path will be for interest rates. Our focus remains on our dual mandate for price stability and full employment.”

Tellingly, Bullock noted there had not been the same degree of market uncertainty as the Global Financial Crisis in 2008, which prompted the RBA to slash interest rates by 4.25 percentage points over six months.

Phil O’Donaghoe, Deutsche Bank’s chief economist for Australia, had expected the RBA to cut interest rates by half a percentage point at the May meeting. He now thinks it will revert to a more traditional quarter percentage point move.

He said the bank was likely to follow up May with rate cuts in August, November and February next year, with the cash rate bottoming at 3.1 per cent.

“The US tariffs still in place on China will – if sustained – significantly weigh on Chinese growth,” he said. “Coupled with a 10 per cent ‘universal’ tariff on other countries, that will still weigh materially on the RBA’s assessment of the global growth backdrop.

“At the same time, the ‘new’ tariff regime will still likely prompt a disinflationary redirection of globally traded consumer goods from the US to Australia and other non-tariff consumer markets.”

But NAB senior economists Sally Auld and Gareth Spence said the RBA would still slash rates by half a percentage point in May on the way to a cash rate of 2.6 per cent by February.

They said the bank may have to play “catch-up” to bring down interest rates and protect the jobs market.

“A weaker global backdrop and the impacts of weaker consumer and business confidence have now shifted the distribution of risks away from a tighter labour market and towards the risk of a rise in the unemployment rate,” they said.

Betashares chief economist David Bassanese said the bank should call an emergency meeting and cut rates a quarter percentage point now and follow that up with a similar move in May.

Bassanese said Trump’s 105 per cent tariff on Chinese goods had lifted America’s average effective tariff rate to its highest level since the Great Depression.

“The good ship USA has still been hit by an iceberg and is taking on water. All that’s happened is Captain Trump has told the crew to stop the engines,” he said.

Campaigning in far north Queensland, Prime Minister Anthony Albanese said the recent turmoil on markets proved the damage caused by the initial tariff plan.

“It is quite clear from the response of the markets that the announcement is doing harm to the United States, it is doing harm to its prospects of employment, inflation, all the key figures as well,” he said.

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