Global Chaos Drives Home a Rate Cut Certainty
Australia’s Reserve Bank appears locked into a rate cut at its May 20 meeting, regardless of the federal election result.
The trigger? A global financial shockwave sparked by US President Donald Trump’s aggressive tariffs, which rattled global markets just days after the RBA’s April meeting.
RBA Governor Michele Bullock has been overtaken by events since the board last met. [Credit: AAP]
Trump’s ‘Liberation Day’ Tariffs Shifted Everything
On April 2 in the US (April 3 in Australia), Trump raised tariffs on China, initiating a worldwide trade war.
Just 48 hours earlier, the RBA had decided to hold the cash rate steady at 4.1 per cent. But the global picture changed instantly.
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Markets reacted fast. Within days, the ASX rate tracker jumped to a 100 per cent expectation of a rate cut in May.
It has since hovered around 79 per cent, suggesting strong market consensus for a 25-basis-point cut. Some economists now even see a shock 50-point drop as possible.
Banks Align with Market Sentiment
Commonwealth Bank was the first of the majors to flag a likely rate cut.
“It has felt longer than two weeks since the April RBA Board Meeting,” a CBA Economics statement noted.
“The US trade war has escalated, financial markets have been extremely volatile and global growth fears have become more than a tail risk.”
CBA expects a standard 25-basis-point cut in May. But they warned that conditions may warrant a 50-point move.
Trade War’s Impact on Confidence and Spending
Judo Bank’s Warren Hogan, long opposed to rate cuts, has shifted position.
“The impact on confidence and sentiment is strongly negative, and that could have a big impact on business and consumer spending,” Hogan said.
He now forecasts two “insurance” rate cuts to counter uncertainty caused by Trump’s trade war.
“We’re caught right in the middle of this trade war between the world’s two biggest economies,” he said.
Markets Brace for More Than One Cut
Money markets have fully priced in a 25-basis-point cut at the RBA’s May meeting.
There’s also a 34 per cent chance of a larger, 50-basis-point move.
National Australia Bank joined the chorus, citing global pressures on growth and inflation.
“Higher barriers on US trade and elevated policy uncertainty put net downward pressure on both growth and inflation in Australia,” said NAB economist Taylor Nugent.
RBA Governor Calls for Patience—But Leaves Room
Despite the market buzz, the RBA isn’t rushing.
RBA Governor Michele Bullock downplayed the scale of current market disruption, comparing it to the 2008 crisis.
Prashant Newnaha from TD Securities noted Bullock’s caution.
“The implication is the RBA is not considering cutting the target cash rate by an aggressive 50bps at its May meeting,” he said.
“Of course the situation may change, but we believe the RBA is on track to cut 25bps at its May meeting.”
He added that the monthly CPI indicator suggested inflation could fall below 3 per cent for the March quarter.
A Growing Economist Consensus
Earlier this month, most economists believed the RBA would hold in May.
Now, just four out of more than a dozen maintain that view.
Others, including Hogan, have capitulated in the face of global instability and Australia’s economic exposure to China.
Trump’s unpredictable policies—including a 145 per cent tariff on China—have wiped trillions off global equities.
Inflation Uncertainty Clouds the Forecast
Australia’s next CPI report, due April 30, will shape the RBA’s final call.
If inflation continues to slow, a rate cut becomes even more likely.
However, economists remain split. Some argue Trump’s tariffs will raise global prices. Others believe rerouted trade could lower inflation.
Still, Some Economists Urge Caution
PinPoint Macro Analytics, Morgans Financial, Macroeconomics Advisory and KPMG remain unconvinced a rate cut is necessary.
They cite ongoing inflation concerns and uncertainty around global trade deals.
“Governor Michele Bullock last week showed she was in no rush to cut interest rates,” said Michael Blythe of PinPoint.
Bullock urged patience as the RBA assesses global trade shifts and their impact on demand and supply.
RBA to Revisit Policy in May
The RBA minutes from April’s meeting indicated that May would be an “opportune time” to reassess monetary policy.
They expect to have clearer data on inflation, jobs, and trade by then.
“Collectively, this information would have a considerable bearing on their decision,” the minutes said.
Small GDP Impact Not Enough to Stop Cut
Even in a worst-case scenario, some believe the trade war’s economic impact on Australia is manageable.
“This small decline in GDP – while incredibly unhelpful and unnecessary – means there is no need for emergency fiscal or monetary policy responses (at this stage),” said KPMG’s Brendan Rynne.
Michael Knox of Morgans Financial agrees it’s too early to assess full impacts.
He pointed to 130 countries now renegotiating trade terms with the US, adding to the uncertainty.
Conclusion: May Cut Almost Baked In
While the RBA maintains a cautious tone, markets, banks, and economists are nearly unified in expecting a rate cut next month.
Trump’s tariffs may have sent shockwaves, but for the RBA, the message is clear—lower rates may be the only path forward.
