Reserve Bank prepares for Trump tariff turmoil

The Reserve Bank has reserved the right to inflict more interest rate pain on borrowers if inflation fails to ease, while expressing concerns that Donald Trump’s tariff war could scare business and shoppers into an economic slowdown.

As official figures suggest the economy had finally picked up some momentum, minutes of the bank’s most recent meeting – at which it cut the cash rate for the first time in more than four years – show the Reserve is increasingly concerned about the impact of Trump’s economic policies.

Donald Trump’s tariff war may force the Reserve Bank to change its thinking on interest rate settings.Credit: nna\NPearson

Global sharemarkets were roiled on Tuesday after the president said planned 25 per cent tariffs on Canada and Mexico and a 10 per cent additional impost on imports from China would go ahead this week. The ASX200 shed 0.6 per cent to finish at a 20-day low, Hong Kong’s Hang Seng lost 0.3 per cent, while Japan’s Nikkei fell by 1.7 per cent.

China’s Ministry of Commerce said it would take countermeasures to protect its interests, while Canadian Prime Minister Justin Trudeau said his government would impose tariffs on $C30 billion ($33 billion) worth of goods immediately and eventually $C155 billion ($172 billion).

“Because of the tariffs imposed by the US, Americans will pay more for groceries, gas and cars, and potentially lose thousands of jobs,” Trudeau said. “Tariffs will disrupt an incredibly successful trading relationship. They will violate the very trade agreement that was negotiated by President Trump in his last term.”

The minutes of the RBA meeting, which was held a fortnight ago, confirmed the bank sliced the cash rate by a quarter percentage point because of signs that inflationary pressures were easing.

It noted, however, that the risks to the economy were growing, and Trump’s tariff policy was the biggest concern.

“Uncertainty about US government policy was high and members noted that this could have a material adverse effect on the propensity of firms and possibly also households to spend,” the minutes showed.

ANZ head of Australian economics Adam Boyton said while he believed the Reserve Bank would keep interest rates steady until August, the threat posed by the Trump administration’s tariff could force it to move earlier.

“The risks to that view are starting to look a little more offshore than domestic, however, and should the global environment deteriorate, then additional RBA easing may become necessary,” he said.

While financial markets had expected the Reserve to cut rates at its February meetings, governor Michele Bullock noted the decision was not a “lay down misere”.

The minutes showed that while the board believed inflation would continue to ease, it was prepared to push rates back up if price pressures intensified.

“If the evolving data signalled that inflation was proving more persistent than expected, it would be reasonable to maintain a more restrictive stance of policy by holding the cash rate at 4.1 per cent for an extended period – given members’ assessment that this level would still be restrictive – or by even tightening policy if the outlook was for inflation to rise materially,” the minutes stated.

“On balance, members judged that accepting the risk of needing to adopt such a course of action was preferable to accepting the risk of holding interest rates high for too long.”

February’s rate cut is expected to support an economy that expanded by just 0.8 per cent in the 12 months to the end of September. On a per capita basis, the economy has been in recession since late 2022.

The national accounts to be released on Wednesday by the Australian Bureau of Statistics are expected to show a rise in economic growth through the final three months of 2024.

Partial measures of GDP, released on Tuesday, show net trade will lift growth by 0.2 of a percentage point and a similar boost will flow from government spending.

Separate figures from the bureau suggest consumers are getting some of their mojo back. Retail sales in January were up by 0.3 per cent as spending on food jumped by 0.7 per cent in the month and expenditure through cafes and restaurants improved by 1.1 per cent.

The only weakness was in household goods, with spending down by 4.4 per cent, due in part to people pulling forward their expenditure to take advantage of discounts offered by retailers in the run-up to Christmas.

KPMG chief economist Brendan Rynne, who is expecting the national accounts to show the economy expanded by 0.7 per cent in the December quarter, said the figures suggested the Reserve Bank would hold rates steady for some months.

“Today’s data provides further evidence that the economy is gaining momentum, as the retail sector has shown an upward trajectory since the second half of 2024,” he said.

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