Election, tariff threat to keep Reserve Bank on the sidelines

The Reserve Bank is set to keep interest rates unchanged on Tuesday as it awaits the outcome of the May 3 election and the impact of US President Donald Trump’s tariffs.

Governor Michele Bullock and the RBA’s new rate-setting board are expected to keep the cash rate on hold at 4.1 per cent. Picture: NewsWire / Martin Ollman

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The Reserve Bank is set to keep interest rates unchanged on Tuesday as it awaits the outcome of the federal election campaign fought on the cost of living, amid concerns that further big spending announcements could rekindle inflationary pressures.

The vast majority of economists expect the central bank’s new rate-setting board will stand pat, keeping the cash rate at 4.1 per cent and reiterating its cautious stance after easing interest rates last month for the first time in more than four years.

Scheduled a day after the RBA’s interest rate call is Donald Trump’s “Liberation Day”, with the US President expected to enact sweeping tariffs. Despite hopes that Australia can secure an exemption, the local economy still risks some fallout if its major trading partners are targeted.

The likely pause comes even as figures for February showed underlying inflation holding within the RBA’s 2 to 3 per cent target and a shock drop in employment by almost 53,000 ­people. RBA governor Michele Bullock and her senior colleagues have stressed, however, that the central bank wants to see further evidence that price pressures will not re-accelerate.

Jonathan Kearns, former head of the RBA’s financial stability department and now chief economist at ­investment management firm Challenger, expected the central bank would maintain its “hawkish” perspective to dampen expectations of further rate relief.

“Policy is not that tight in Australia,” Dr Kearns said. “There’s still some indicators that economic activity is going pretty well and in that light, there’s no need for rapid rate cuts.”

After Anthony Albanese last week unveiled another round of tax cuts and Peter Dutton promised to temporarily slash the fuel excise, economists are worried both major parties could unveil additional pre-election sweeteners before the May 3 election.

Goldman Sachs’ Australian chief economist Andrew Boak said an interest rate pause on Tuesday would “give the RBA visibility on the likely fiscal policy settings accompanying the election result.”

While Labor is hoping for an interest-rate cut to improve its economic bona fides, the Opposition Leader on Monday expressed support for rate relief before later laying blame on profligate government spending for keeping the RBA on the sidelines.

“It would be great to see a rate cut but under a government that’s spent an extra $425bn, and under a government that would be a huge taxing government if they were in coalition with the Greens, that spells higher inflation,” he said.

The RBA is likely to give a more detailed indication as to how Mr Trump’s tariff war will affect growth in Australia and whether that might be incorporated into interest decisions sooner rather than later.

HSBC chief economist Paul Bloxham said the RBA would treat Mr Trump’s tariffs as risks to economic growth rather than a risk that would demand it to act pre-emptively.

So far, the RBA’s own analysis predicts Mr Trump’s tariffs would be “disinflationary” for Australia, Treasury showed in budget papers last week that the tariffs would have a neutral impact on inflation. Plenty of market economists share a similar view.

Regardless of the outcome of the trade war, Corinna Economic Advisory’s Saul Eslake said part of the RBA’s decision to keep rates on hold would have more to do with the costs of uncertainty created as opposed to any guesses on the actual impact of higher tariffs.

“When there is too much uncertainty, you don’t do anything,” he said.

Heightened concerns over the economic impact of tariffs have prompted bond traders to bolster their rate cut bets in recent days to now imply 21 per cent chance of a quarter-percentage-point rate cut on Tuesday, up from just 6 per cent last week. Money markets ascribe near three-in-four odds for a move lower at the RBA’s decision slated for mid-May, though a cut isn’t fully priced in until July.

Tuesday’s interest rate decision will be the first made by the central bank’s new rate-setting committee, with former Bendigo and Adelaide Bank chief executive Marnie Baker and academic macroeconomist Renee Fry-McKibbin joining the nine-member board established after a sweeping review of the RBA.