Donald Trump’s economic chaos hits outlook for Australia’s interest rates

Yesterday, economists were tipping a super-sized rate cut when the RBA meets in a few weeks, but a lot can change in 24 hours – thanks to Donald Trump.

In Donald Trump’s “unpredictable” world, a lot can change in the span of 24 hours.

Just yesterday, economists were tipping a super-sized interest rate cut when the Reserve Bank of Australia board meets next month.

That significant expectation was based on the US president’s wild tariff war on much of the world, which was wreaking economic havoc.

But overnight, Mr Trump blinked and there will now be a 90-day pause on his announced tariffs.

“’Unpredictable’ is the word,” Shane Oliver, chief economist and head of investment strategy at AMP, told news.com.au.

“By the same token, I’m not surprised. Donald Trump is just so unpredictable that these things are par for the course.”

In the face of mounting pressure, US President Donald Trump has blinked and hit pause on hefty tariffs for 90 days. Picture: AFP

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That level of significant uncertainty from the world’s largest economy is sparking chaos across the globe, including in Australia.

It makes forecasting the RBA’s next move on interest rates a little challenging.

Over the past week, as share markets melted down on the back of Mr Trump’s declaration of a trade war, there were calls here for the RBA board to call an emergency meeting and slash the cash rate.

“I think everyone went into hyper drive a little,” Dr Oliver said. “That was probably a bit far.

“This development pulls back a little bit on those expectations, but I think we’re still going to get at least 25 basis points in May, and there’s maybe a 50 per cent chance we’ll get 50 basis points.

“Obviously, a lot depends on what happens between now and then.”

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Data from comparison service Canstar shows a standard rate cut next month would slash $76 per month off the repayments on a $500,000 mortgage.

If it was super-sized, that figure would leap to $151 per month, providing some good breathing room for stretched household budgets.

What’s firming is the high likelihood of more rate cuts throughout the year than otherwise would’ve been the case, he said.

“We had expectations for two cuts, but we’ll probably end up with four.”

Markets rallied in the wake of Donald Trump’s backdown, but the significant damage has been done. Picture: AFP

Fears of an imminent collapse in the global economy have certainly eased with the 90-day pause, John Hawkins, a senior lecturer at the University of Canberra’s School of Politics, Economics and Society, said.

“But even with the pause, China’s tariff rate is up to 125 per cent, so there’s still a war between the world’s two largest economies,” Dr Hawkins said.

“And China is out largest export market, so that’s disturbing for us. Plus, we don’t get a reprieve – we’re still on 10 per cent anyway.”

After its last meeting, the RBA board released a statement that contained the word “uncertain” five times, he pointed out.

“I’m not sure how many more times it’ll be said in the next statement.

“For now, it’s the US and China relationship that’s suffering, rather than the US and everywhere. Maybe that means the 50 basis point cut is less likely and we see 25 basis points being more likely, with another 25 at the meeting after.”

A rate cut is still likely next month but probably not a super-sized one, experts say. Picture: NewsWire/ Monique Harmer

The March quarter CPI data, which will be released on April 30, will be crucial in shaping the board’s decision-making.

“I would expect it’ll show the underlying rate of inflation getting under three per cent and the headline rate in the low two per cent range,” Dr Hawkins said.

“I think that’ll give the bank enough confidence to feel we don’t need a tight monetary policy, so a modest easing would be reasonable.”

In the meantime, he said “significant damage” had been inflicted on global economies, and even though Mr Trump has blinked, what happens next is anyone’s guess.

Donald Trump’s tariff war had thrown global markets and trade into chaos. Picture:" AFP

“It seems to be a function of how obsequious leaders are in paying tributes to the president and what they can offer,” he said.

“I feel sorry for any business leader trying to make decisions about where to invest, where to locate production facilities and so on, when the situation can change – and does change – day to day like this. In some cases within a day.

“I suspect a lot of people will just decide to sit on their hands and see what happens. A lot of people are likely hoping things settle down into some sort of pattern so they can make decisions.

“It’s bad for global economic activity.”

Dr Oliver agreed that a new era of uncertainty and instability seems to be “par for the course”.

“Just yesterday, he was talking about more tariffs on pharmaceuticals, semiconductors, cooper and so on. It’s too early to say it’s over.”

He noted that today’s development shows Mr Trump has likely “hit a pain threshold” with US shares down 20 per cent.

“The big positive is that he’s blinked. That suggests he’s getting nervous,” Mr Oliver said.

But the deteriorating relationship with China will further damage the global economy and Australia is “heavily exposed” to those consequences.

The RBA board next meets on March 4. The official cash rate current sits at 4.1 per cent.