‘TACO’ trade tempered Reserve Bank fears as Trump’s tariff threats fizzle

Diminishing fears of a severe global economic shock from Donald Trump’s tariff agenda was a key factor in the Reserve Bank’s surprise decision to keep rates on hold earlier this month.

US President Donald Trump enjoys a taco.

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Diminishing fears that a “severe” global economic shock will arise from Donald Trump’s aggressive tariff agenda were among the factors behind the Reserve Bank’s surprise decision to keep the cash rate steady at 3.85 per cent earlier this month.

Minutes from the RBA’s July 7–8 board meeting, released on Tuesday, showed that while all nine members of its rate-setting committee agreed that further cuts were on the horizon, how fast they should be delivered was a point of contention.

“All members agreed that based on the information currently available, the outlook was for underlying inflation to decline further in year-ended terms, warranting some additional reduction in interest rates over time,” the minutes read. “The focus at this meeting was on the appropriate timing and extent of further easing, against the backdrop of heightened uncertainty.”

Reserve Bank governor Michele Bullock. Picture: Christian Gilles / NewsWire

With Australia’s export-led economy vulnerable to global shocks, the RBA has previously flagged its concern that the US President’s tariff onslaught could weigh heavily on local growth, ­necessitating it to quickly ease ­interest rates to stoke activity.

But the new meeting minutes showed those fears had since eased, with the board noting the “probability of the global economy evolving in line with the most severe downside scenarios … looked to have declined since the previous meeting.”

In recent months, investors have brushed off Mr Trump’s threat to slap broad tariffs on US imports, backing the so-called TACO trade – the belief that “Trump Always Chickens Out”.

That sentiment was fuelled after a 90-day pause on most of Mr Trump’s tariffs expired without delivering the promised wave of trade deals, prompting the US President to announce another delay to the new levies.

The RBA minutes echoed this narrative, observing that corporate bond spreads had been squeezed, equity markets were “at or near record highs” and risk premia remained low – a recent shift the board linked to expectations the most severe US tariff outcomes would be avoided.

Other factors influencing the RBA was the still-tight jobs market, which it views as a source of price pressures, and concerns among board members that recent figures may have “overstated” the slowdown in inflation.

The board also pointed to a stronger-than-expected increase in private demand during the March quarter, while ongoing weak productivity growth was complicating its ability to accurately assess the capacity of the economy.

July’s RBA meeting was held before the latest employment figures revealed a rise in Australia’s jobless rate to 4.3 per cent, the highest level in more than three years.

That uptick has solidified expectations of a further easing in interest rates, with financial markets fully priced for a quarter-point cut at the central bank’s upcoming August 11–12 meeting, which would bring the cash rate to 3.6 per cent.