Key detail in latest interest rate cut as RBA keeps a close eye on the US

Aussies have been issued a warning in the wake of Tuesday’s rates cut, as the potential impact of the US tariff drama comes to light.

Interest rates have fallen once again and, while this is welcome news to many struggling homeowners, experts have issued warnings about some of the ramifications Aussies could see off the back of this decision.

On Tuesday, the Reserve Bank of Australia cut the cash rate by 25 basis points, to 3.85 per cent.

This is the second time the cash rate has been cut in 2025, with the move welcomed by mortgage holders, who, prior to this endured a period of prolonged, brutal rises, followed by more than a year of rates being held.

But, while the focus has primarily been on mortgage holders, industry professionals say it is also having an impact on many Aussie bank accounts.

Leading Australian fund manager, Betashares, has warned that people with savings in the bank should brace to see their income fall along with any future rate drops, as the banks cut interest rates on term deposits.

The company noted many banks have already reduced their interest rates on term deposits by about 0.60 per cent, with further falls of about 0.50 per cent expected in this space, according to Betashares analysis.

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“As a result of these cuts, future income that savers could expect to earn from Australia’s $1 trillion pot of term deposits has dropped by $6 billion and could potentially continue to fall another $5 billion,” the company said.

Betashares CEO, Alex Vynokur, said there were multiple options out there for Aussies looking to make returns on their savings.

“In the coming months, the returns from bank deposits are expected to fall in line with continued interest rate cuts from the Reserve Bank,” he told news.com.au.

“In this climate, cash and fixed income ETFs will be topical for investors seeking to make up for declining returns from cash sitting in the bank.”

Why Aussies didn’t see a bigger rate cut

In her press conference, Governor Michele Bullock indicated the RBA was considering handing down an even bigger cut of 0.5 per cent but, ultimately, they decided against it.

This was in the wake of US President Donald Trump’s April 2 tariff announcement, the scale and scope and which Ms Bullock admitted left the Board and the central bank’s economic team “completely blown out of the water”.

“There was an argument and we did debate it (a 50 basis point cut) but it wasn’t the strongest argument in the room,” she said.

Michele Bullock, Governor, Reserve Bank of Australia, said a 0.5 per cent cut was debated. Picture: NewsWire/ Monique Harmer

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However, Betashares Chief Economist, David Bassanese, claims that, while a 0.5 per cent cut may have been on the table a few weeks ago, it was likely not given very high consideration during this most recent meeting.

This is due to Mr Trump momentarily rolling back some of his harsher tariff announcements in order to allow trade deals to be negotiated.

“Fears of a US recession have eased and, with that, the sense of emergency that might have led the RBA to cut by 0.5 per cent,” he said

Mr Bassanese said Tuesday’s cut was not a knee-jerk reaction to outside influences like US tariffs, instead it “reflects the simple fact that underlying inflation is falling back to the RBA’s 2-3 per cent target band.

The latest Q1 Consumer Price Index report showed inflation fell to 2.9 per cent in the March quarter, down from 3.2 per cent in December quarter.

Inflation falling back to more neutral territory is exactly what the RBA had hoped to achieve with its “narrow path” strategy, that saw interest rates rise sharply and slowly ease as inflation came back down.

Ms Bullock said she now felt comfortable retiring the narrow path analogy “for now”.

“I don’t want to sort of suggest that I am 100 per cent confident we are there, but it is really encouraging we have got inflation down and we still have employment holding up,” she said.

“But this is not a situation that is the equilibrium. We’re always going to be thrown off course by things, as we have seen.”

US President Donald Trump. Picture: Saul Loeb / AFP

More cuts expected as RBA eyes Trump

Like the RBA, Mr Bassanese expects that the annual underlying inflation will ease further in the coming months to sit around the midpoint of the 2-3 per cent target band.

If this happens, he said it should allow the RBA to cut the cash rate even more, with the economist suggesting a “neutral level” would be around three per cent.

This would allow for three further rate cuts up until early 2026, from 3.85 per cent to 3.1 per cent.

“Barring an upsurge in global or local economic growth concerns, the RBA may likely cut rates following each of the next few CPI reports,” Mr Bassanese said in his analysis.

“This is providing these confirm a further easing of inflation in line with the RBA forecasts.”

And, while the chaos around Mr Trump’s tariff orders is expected to continue to ease, if it doesn’t, then it could lead to more significant cuts by the RBA.

If the tariff drama ramps back up and the US can’t reach deals with its major trading partners, there is a risk the US could fall into recession.

If this does happen, Mr Bassanese said the RBA could “easily” cut rates as far as 2 per cent or even lower.

In her press conference, Ms Bullock made it clear that, while the situation in the US had eased for now, the RBA would be keeping a close eye on any new developments and is prepared to respond as needed.

“We are in a good position but there are things coming down the pipeline and we don’t know what they are and how they are going to impact us,” she said.