Trump calls it a truce – the RBA might call it time for a rate cut

The truce in Donald Trump’s trade war with China has given the Reserve Bank the green light to deliver interest rate relief to the nation’s mortgage holders, but hopes of deep cuts by year’s end are on hold as the economy starts to pick up speed.

Financial markets and economists expect the RBA to use its meeting next Monday and Tuesday – the first gathering since Trump launched his “liberation day” tariff assault on the globe – to slice rates by a quarter percentage point to 3.85 per cent.

Anthony Albanese’s election win and Donald Trump putting the brakes on his tariff decisions have consumers feeling a lot better.Credit: Aresna Villanueva

On a $600,000 mortgage, the cut would reduce monthly repayments by $100.

There had been expectations the RBA would slice rates by up to half a percentage point after Trump’s tariffs, but the negotiating of a 90-day truce with China this week has wound back forecasts to a single cut and three more by year’s end.

Treasurer Jim Chalmers on Tuesday said the truce, which would still leave tariffs of at least 30 per cent on most Chinese imports to the US, was significant and encouraging.

“But we need to temper our expectations here. There’s still a lot of unresolved issues. There’s a lot of uncertainty, unpredictability, volatility in the global economy,” he said on ABC.

President Donald Trump’s truce in his trade war gives the Reserve Bank clear air for a rate cut next week.Credit: nna\advidler

“Australia’s got a lot to lose from a trade war between the US and China in particular, and so we want to see these trade tensions de-escalated permanently, not temporarily.”

AMP chief economist Shane Oliver said while a quarter percentage point rate cut was all but assured next week, a super-sized interest rate cut was off the agenda while money markets were winding back expectations of a string of rate reductions through the rest of the year.

He said while markets were relieved at the hold put on huge tariff rates, the US had still increased its average tariff rate on all goods to its highest level in decades, which in turn would have an impact on economic growth and inflation.

Oliver cautioned that, given Trump’s track record, there was a chance the tariff war truce could end abruptly.

“It’s a bit like the couple going to get married, and he’s already run away from it once or twice. He could be walking into the church and still leave, we just can’t be sure,” he said.

Despite the truce, the higher tariffs will have an impact on American consumer prices.

Oxford Economics estimates overall prices will increase by 0.8 per cent this year, but for some goods the impact will be much larger. Everything from household appliances (5.1 per cent) to sporting equipment (3 per cent) is likely to get more expensive.

The organisation’s chief US economist, Ryan Sweet, also cautioned that the trade war would have lingering impacts.

“Uncertainty will likely not fall significantly. There are no guarantees that the reduction in tariffs on Chinese goods will stick. The lack of clarity will keep uncertainty about future tariffs elevated,” he said.

“Our past work shows that uncertainty will be a drag on business investment in equipment, along with structures, over the remainder of the year.”

Australia’s inflation rate has continued to ease over the past year. The March quarter inflation figures, which were released late last month, showed underlying inflation inside the RBA’s 2-3 per cent target band for the first time in more than a decade.

Separate data on household spending showed it was flat through the first three months of the year, and fell in per capita terms.

There are already signs that the easing in trade tensions and the re-election of the Albanese government are lifting confidence among consumers.

The closely watched Westpac-Melbourne Institute measure of consumer confidence lifted by 2.2 per cent this month, after taking a battering after Trump’s “liberation day” tariff assault.

Senior Westpac economist Matthew Hassan said sentiment had recovered a third of the loss it took last month, due in part to the rebound on financial markets as Trump reversed his tariffs and the “clear-cut” federal election result.

He said falling petrol prices – which have dipped, on average, by 13 cents a litre over the past month – had also contributed.

Consumer confidence is heavily influenced by political affiliation, with supporters of the party in government more likely to be upbeat about their finances and the economy than those whose party is in opposition.

Hassan said there had been a bounce in confidence among both Labor supporters and those who described themselves as swinging voters.

“Responses across the survey week and across voter subgroups suggest the federal election result was a small positive,” he said.

“Sentiment was notably higher amongst those surveyed in the first few days of [last] week.”

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