Reserve Bank watching US economy fallout for impact on local cash rate

The Reserve Bank says the data will decide when it cuts the official cash rate again, as developments from US tariffs complicate the decision.

Households hoping for back-to-back rate cuts may have to wait for the uncertainty around US policy to clear.

In her speech at the AFR Banking Summit, RBA chief economist Sarah Hunter confirmed the Donald Trump trade tariffs were causing “uncertainty”, which will affect future rate decisions.

“One of the things we are focused on right now is US policy settings, the impact of these on the global economy and how this flows through to activity and inflation here in Australia,” Ms Hunter said.

“We have been using scenarios, analysis and judgment to assess the policy implications.”

The chief economist said the RBA would remain forward looking, with decisions based on forecasts and new data sets as they unfold.

RBA chief economist Sarah Hunter said the central bank will remain forward looking. Picture: NewsWire / Martin Ollman

“Policy decisions require both a view of the outlook for the economy and an understanding of how policy is likely to affect that outlook,” she said.

“That helps the board set the cash rate to give the best chance of achieving the RBA’s objectives over time.”

The RBA cut the cash rate for the first time since the covid pandemic in February dropping the cash rate from 4.35 to 4.1 per cent.

The bank’s new monetary policy board will meet on March 31 to April 1 to decide the cash rate, but markets are predicting the next cut will most likely come at the May meeting.

Dr Hunter said it was important to understand how policy would impact the economy as there was a lag between rate cuts and the economic benefits of it.

“So, if inflation moves away from our target, or employment falls below full employment, monetary policy cannot immediately offset those moves,” she said.

“Instead, central banks have to look ahead. Ideally we would know when and by how much the economy is going to move away from our targets in the future.”

The chief economist said the future pathway for the cash rate was not predefined.

“In practice we are uncertain about both the outlook for the economy and the effect of monetary policy, and this complicates policy decisions,” Dr Hunter said.

“Under uncertainty, policy depends on more than just the central forecast – judgments about the risks and uncertainties matter too.”

Dr Hunter’s comments are in line with Treasurer Jim Chalmers budget speech Picture: NewsWire / Glenn Campbell

Dr Hunter’s comments are in line with federal Treasurer Jim Chalmers, who will hand down the budget on March 25, who used pre-budget speech on Tuesday to warn on the uncertainty and global volatility caused by tariffs.

“Even in the most benign scenario, global growth over the next three years is expected to be its weakest since the 1990s,” Mr Chalmers said.

Mr Chalmers said the direct impact of the US’s 25 per cent tariff on steels and aluminium exports is a “manageable” hit to GDP.

“Treasury estimates the direct hit to GDP from steel and aluminium tariffs would be less than 0.02 per cent by 2030,” he said.

“But when you add in the indirect effects, the hit to GDP could be more like 0.1 per cent by 2030.”

Mr Chalmers warned the bigger impact on Australia could be the flow on impacts of a global trade war.

“In fact, over a range of scenarios, the Treasury found the indirect GDP impacts of a trade war could be up to four times larger than the direct effects of tariffs on our economy,” he said.

“Our response to this will not be a race to the bottom on tariffs. We’ll go for more resilience, not more retaliation.”

“Because more and higher tariffs would harm, not help, our workers, businesses, industries and economy.”

The OECD has also said Australian economic growth will likely slow across 2026, as US President Donald Trump’s tariff agenda threatens to hit growth around the world and rekindle inflation.

GDP growth in Australia was 1.1 per cent in 2024, the March report said, and is expected to rise to 1.9 per cent in 2025 before falling to 1.8 per cent in 2026.

The 2026 rate represents a 0.7 per cent decline on the forecasted growth rate from the OECD’s December report.

“Growth in both Korea and Australia is projected to hold up but to be weaker than previously expected,” the report states.

Originally published as Reserve Bank watching US economy fallout for impact on local cash rate