Interest rate cut was nearly bigger as instability fears linger

Struggling home buyers almost received a super-sized interest rate cut after the Reserve Bank admitted there was a risk that Donald Trump’s tariff war could drive Australia into recession, paving the way for more rate relief in coming months.

Following its first meeting since Trump’s “Liberation Day” tariffs, the bank’s monetary policy committee on Tuesday sliced official interest rates by a quarter percentage point to 3.85 per cent – the first time the cash rate has been below 4 per cent in two years.

RBA governor Michele Bullock said the bank’s decision to cut rates this month was a “confident” one.Credit: Oscar Colman

NAB, ANZ, Westpac and the Commonwealth Bank all announced they would pass on the rate cut in full soon after the decision, reducing the interest repayments on a $600,000 mortgage by about $100 a month.

Financial markets put the chance of a follow-up rate cut at the bank’s July meeting at 50-50, while a quarter percentage point cut by August is fully priced in.

By early next year, markets believe official interest rates will be down to 3.1 per cent.

At a press conference following the decision, RBA governor Michele Bullock said the possibility of holding rates steady was quickly cast aside for a debate on how deeply to cut.

“There was a discussion about 50 [basis points] and 25, and the board was of the view that 25 [basis points] was the right number,” she said.

With annual inflation forecast to settle at 2.6 per cent for the next two years – well within the bank’s 2 to 3 per cent target range – Bullock said the bank was confident in its decision to cut rates as risks of an inflation surge appear “diminished”.

“If you add the international uncertainty, that gives you a little bit of confidence that ... the risks have actually balanced up a bit,” she said.

Bullock said the bank deliberately took a cautious approach over recent years to bring down inflation gradually without driving up unemployment.

Bullock admitted she was “completely blown out of the water by the scale and scope” of the US tariffs announced just hours after the RBA held rates steady in April.

Modelling by the bank suggests if tariffs were pushed back up to where they were when announced by Trump, the Australian economy would end up 3 per cent smaller than it otherwise would be over the next two years.

Unemployment, currently 4.1 per cent, would be pushed up towards 6 per cent or the equivalent of more than 200,000 extra people out of work.

Bullock admitted that this would effectively mean Australia had fallen into a recession.

“If you look at our scenario analysis, it does suggest that in a really bad outcome, there could possibly be a recession,” she said.

“I’m not putting a strong possibility on a really, really bad outcome, but I think we have to be alert that there might be.”

The bank continued to express concern about low levels of productivity growth across the economy, saying the labour market remained tight and that household consumption was slower than expected three months ago.

Treasurer Jim Chalmers said the rate cut reflected the progress made in bringing down inflation without causing damage to other parts of the economy.

“We haven’t had to pay for that progress with substantially higher unemployment or a substantially slower economy. And that makes us unusual around the world that we’ve been able to get inflation down,” he said.

The rate cut is welcome relief for business owners such as Rebecca Cardamone, who owns Melbourne-based property development company iSubdivide and has seen a shrinking in her customer base over the past few years.

“Higher interest rates have caused buyers to scale back or put their plans on hold,” she said, noting her clients had shifted from large-scale developers to individual home owners looking to build granny flats in their backyards to reduce their mortgage burden.

Rebecca Cardamone said an interest rate cut would give her customers more confidence. Credit: Justin McManus

Since the first rate cut in more than four years in February, Cardamone said more customers were already beginning to come back into the market.

“We’ve seen confidence increasing and larger developers – those wanting to build 14 to 16 townhouses – come back,” she said. “Another rate cut will increase our customer pool and give more confidence to people to start and resume projects.”

RSM Australia economist Devika Shivadekar said the rate cut could provide a boost to businesses looking to become more competitive.

“By easing financial pressure, this rate cut could give businesses the confidence to invest in the infrastructure and technology needed to lift productivity over the long term,” she said.

But for those looking to get a foot in the property market, such as Sydney couple James Martin and Liz Upcroft, both 28, the interest rate cut is cause for some concern.

James Martin and his girlfriend Liz Upcroft at Edmonson Park, where they hope to buy in the future. Credit: Sitthixay Ditthavong

“My girlfriend and I moved into my parents’ house in Harrington Park to save up a deposit for a property,” Martin said. “We’re looking to buy an apartment in Parramatta or Edmondson Park later this year, but we’re worried the rate cut could increase demand and push up house prices, which makes it harder for people like us trying to get into the housing market.”

Property and finance expert Simon Podger said a rate cut would increase the number of first-home buyers entering the market but also increase their borrowing power

“Increased borrowing capacity should see an increase in first home-buyers able to get into the market, with a reduction in rates also helping them with that deposit hurdle,” he said.

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