It should have cut interest rates to make policy settings less restrictive, providing a buffer to the economy and confidence, instead of fussing about fading inflation risks while steering the bank wide of potential political entanglements ahead of a federal election on May 3.
RBA governor Michele Bullock speaks a lot about the central bank’s role of cautiously watching and waiting. This was a time for the central bank to do something. It now looks flat footed.
It was surprising to hear from Bullock at her press conference on Tuesday that the RBA’s interest-rate setting board didn’t even examine a scenario for a cut at its two-day meeting despite the shadow over the world’s growth outlook.
Risks associated with the imminent dismantling of the international rules-based order that exists to smooth out trade disputes between countries were thrown around at the policy meeting, but it appears nobody was asked to vote on a cut.
Recent reforms of the RBA’s board system were meant to encourage dissent to contest the central bank’s narrative. Apparently that didn’t happen.
It’s not as if the Trump Administration had concealed its plans for far-reaching reciprocal tariffs. Most of what has transpired since “Liberation Day” was eminently predictable.
To be sure, Washington’s new trade regime has introduced a level of fear and loathing into markets that approaches conditions at the start of the Covid-19 pandemic, and worse, the collapse of market confidence during the global financial crisis in 2008.
The market fallout has come thick and fast, prompting JPMorgan to raise its probability of a coming recession in the US and the world economy to 60 per cent from 40 per cent on Friday.
The scope of the tariff wall being erected by the Trump White House is huge, but at the same time it’s nearly impossible to find any economic commentators or academics ready to offer a logical explanation for what Washington has done.
The overwhelming consensus is that the US has kicked a monumental “own goal”.
As markets tumble, some are hoping the proposed tariffs can be renegotiated down to something that does far less to destroy global supply chains and business confidence. But the tariffs appear more than just bargaining chips that the US hopes will deliver it more favourable trade deals. It’s far more likely that they will be a permanent part of the economic landscape going forward.
For the RBA, the ongoing ructions are stoking the case for a 50 basis point cut in the official cash rate in May. Economists are now musing about the prospect of an emergency cut, while also adding to the number of cuts they expect this year.
“More aggressive RBA easing now seems more likely than not. We would not rule out a 50 basis point cut in May if sentiment sours and the global growth outlook deteriorates sufficiently,” said the head of Australian economics at ANZ, Adam Boyton. ANZ now expects the RBA to cut interest rates three times by August.
This is a big test for the RBA, and the spotlight will fall heavily on Bullock when she delivers a speech to the Chief Executive Women Melbourne Annual Dinner in Melbourne on Thursday.
So as events change, Bullock will need to update markets directly over how the bank assesses the international environment, and lay out the policy options before the central bank.
A question or two might also be asked about why the board didn’t kick around the idea of a cut this week knowing that the international economy was facing huge new challenges. The lags involved in monetary policy means any impact of a lower official cash rate in late May might not arrive to support business activity until later this year or early in 2026.
Bullock can deal the RBA back into the game.
The Wall Street Journal
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The Reserve Bank of Australia missed a golden opportunity to shine this week when it kept interest rates on hold instead of responding meaningfully to the fire storm that now envelops the global economy and international markets.