Reserve Bank rejects back-to-back rate cuts, ‘well placed’ to deal with Trump tariff fallout

Jim Chalmers on Tuesday immediately looked to the potential for a May rate cut, as he said the mooted post-election RBA shift would be a result of Labor’s strong economic management.

The Reserve Bank has kept interest rates on hold. Artwork: Frank Ling

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The Reserve Bank is gaining in confidence that inflation is back under control despite risks from high labour costs and the threats of a looming trade war, all but locking in another 25-basis-point rate cut after the May federal election.

RBA governor Michele Bullock and the bank’s newly formed monetary policy board held rates on Tuesday, citing tightness in the labour market and US President Donald Trump’s upcoming round of reciprocal tariffs as reasons not to deliver relief to households.

Ms Bullock also said Labor’s pre-election budget last week – which included $35bn in net new spending – had already been factored into the central bank’s assumptions on rates.

While she denied she had been under any undue political pressure from Jim Chalmers to cut rates earlier, at the board’s February meeting, Ms Bullock also did not deny there had been a heated call with the Treasurer as the RBA resisted earlier calls to cut rates as global growth prospects slowed with a looming trade war.

“Many indicators suggest that the labour market is tight, and the board has discussed the possibility that there’s more strength in the economy, which could make it harder to get inflation back down,” Ms Bullock said.

“I’m not suggesting that I’ve made up my mind or the board’s made up its mind. We’re just going to wait and see. I’d say that we’re gradually getting more confidence. If you look at our forecasts, and you look at how inflation is tracking relative to forecasts, we’re actually doing pretty well.”

Treasurer Jim Chalmers. Brisbane. Picture: Lyndon Mechielsen / NewsWire

Dr Chalmers on Tuesday immediately looked towards the potential for a May rate cut, as he said the mooted post-election RBA shift would be a result of Labor’s strong economic management.

“I don’t make predictions about the future, but I do remind people that there was almost no expectation whatsoever from the markets and from the economists today of a rate cut, but there is an overwhelming expectation of a rate cut in May and in subsequent months,” he said in Brisbane.

“That’s the expectation of the market. I don’t get into those sorts of predictions.”

Opposition Treasury spokesman Angus Taylor said the Reserve Bank’s decision to hold rates on Tuesday “continues to underscore” fallen real income.

“Let’s be clear – Australian standards of living have collapsed since Labor came to power,” Mr Taylor said.

“Eight per cent down in just under three years … This will be a lost decade for Australians if Labor stays in power.”

Opposition Treasury spokesman Angus Taylor Picture: Dan Peled / NewsWire

Underlying inflation has been falling and is now 2.7 per cent, within the RBA’s desired range of 2-3 per cent.

Financial markets are now pricing in a 73 per cent chance of a 0.25-percentage-point rate cut at the next board meeting on May 19-20.

Ms Bullock said the monetary policy board, which includes former bank boss Marnie Baker and academic Renee Fry-McKibbin, was focused on risks to inflation in Australia, but said last week’s budget was “a wash” and that it was “pretty much the same fiscal impulse” the bank had already included in its inflationary forecasts.

The governor said there was still a lot of uncertainty around the global outlook, which could hurt the local economy, lower inflation and make a rate cut more likely.

“Australia, as a small, open economy, has benefited massively from open trade. So it’s not good for us if the world trading system is fragmenting,” she said.

Having previously assessed that Mr Trump’s tariffs could be “disinflationary” for Australia, the board said the current interest rate settings meant it was “well placed” to respond in the event of a “material” impact on the domestic economy.

“One of the things we’re cautious about is that policy unpredictability overseas could lead to slower growth. The implications for inflation here, though, in Australia are less clear,” Ms Bullock said.

RBA governor Michele Bullock speaking to reporters on Tuesday. Picture: NewsWire / Nikki Short

The governor said she had been in discussions with other central bank leaders about trying to understand the path for rate cuts.

“We’re talking to our peers in other central banks, particularly other small, open economies, to try to make sense of what is going on now and what we can expect from the next years. We’re paid to worry, to analyse and to make judgments.”

As the RBA pauses, other central banks across the world have cut rates harder and faster. The US Federal Reserve has cut its rate by 100 basis points since September, before pausing this year as the threat of inflation rises back up under the Trump administration.

New Zealand’s Reserve Bank has cut its official interest rate to 3.75 per cent, marking a fourth consecutive cut as inflation eases.

Ms Bullock said Australia was behind this path of rate cuts because it had not raised rates as much.

“We didn’t go as high as other countries, and so we don’t really have as much restrictiveness in they had in order to remove,” she said.

The governor has also raised the cost of housing as part of the inflation puzzle but washed her hands of any effect on property prices from rate cuts.

“There is a shortage of supply in housing and more demand. That’s the essential problem,” she said. “I think it’s very difficult to forecast house price rises. House prices were rising when interest rates were going up. So it’s not an easy sort of relationship. You can’t just correlate one with the other. So I guess I don’t have any particular things to say to people who are finding it difficult for the housing market.