Expectations rise for 50-bp rate cut in May

Indeed, in the few days since the tariffs were released, the Australian dollar plunged to below US60¢ for the first time since the COVID-19 pandemic (albeit it has recovered slightly in the past 24 hours) and expectations are now rising that the Reserve Bank of Australia (RBA) may hand down a bumper cash rate cut at its next meeting on 20 May.

ANZ moved its rate forecast on Friday (4 April) and said: “We do not rule out a 50bp cut in May if sentiment sours and the global growth outlook deteriorates sufficiently.”

Phil O’Donaghoe, economist at international investment bank Deutsche Bank AG, has also now said that the RBA will reduce rates by 50 bps at its next meeting.

In a research note on Tuesday (8 April), O’Donaghoe said that the official cash rate will fall to 3.6 per cent in May and then continue falling over the year to reach a terminal cash rate of 3.1 per cent.

In fact, the ASX Rate Indicator now shows that 96 per cent of the market expects the cash rate to decrease from its current rate of 4.10 per cent to 3.60 per cent at the next RBA board meeting. This would be the largest single rate cut for 13 years (since May 2012).

Other lenders have also started revising their forecasts; the chief economist of non-major banking group AMP, Shane Oliver, has also said that the RBA may cut rates further than originally expected.

Writing in his Insights report on Tuesday morning, Oliver said: “If we refrain from retaliatory tariffs on US imports (as appears likely), Trump’s tariffs are more likely to hinder growth than boost inflation, supporting further RBA rate cuts. We had been forecasting 3 more 0.25 per cent rate cuts (in August, November and February) but the Trump tariff shock means this could now be 4 or 5.

“While the $A has fallen to a five-year low around $US0.60, it fell 39 per cent in the GFC and 19 per cent in the pandemic and yet the RBA still cut rates then because the threat to growth swamped any threat of higher inflation and the same will likely apply in response to Trump’s tariff shock.”

Similarly, HSBC’s Paul Bloxham now predicts the RBA will cut the cash rate by 25 bps at the next meeting in May (a change from his previous forecast of July), due to the economic impacts of “Liberation Day” tariffs.

He anticipates three more cuts in subsequent quarters, bringing the cash rate down to 3.10 per cent by early 2026.

Greens call for emergency RBA meeting

While the next RBA monetary policy board meeting isn’t scheduled to be held until 20 May, some are also now calling for an emergency meeting to be held in order to lower the cash rate sooner.

The Australian Greens have said that the RBA should cut interest rates immediately given the “global economic crisis” caused by the Trump tariffs.

“The RBA will cut interest rates at their next meeting, but they should not sit on their hands for another six weeks while the crisis unfolds,” Greens economic justice spokesperson, Senator Nick McKim, said.

“CPI is already in the RBA’s target band and trending down, and economists are debating the size of the upcoming interest rate cut, not whether or not it will happen. There is no justification for the RBA to delay.

“People are hurting already, and every week of delay increases the risk of a recession, which will hurt Australians even more.

“People are getting smashed everywhere – the supermarket checkout, power bills, health and transport costs. A bit of mortgage relief would ease the pressure on millions of Australians.”

What does the Australian government think?

While federal Treasurer Chalmers said that Australia is “well placed and well prepared to deal with the uncertainty we see in the global economy” (citing “progress” made by the Albanese government over the past three years), he has noted that there is increasing chatter that the next Reserve Bank interest rate cut in May “might be as big as 50 basis points.”

In a media briefing on Monday, he said: “Markets are now expecting around four interest rates cuts in Australia this calendar year ... more than 50 per cent expectation in the markets that the next Reserve Bank interest rate cut in May might be as big as 50 basis points. So the Australian dollar is reflecting that; those concerns about China but also the very different expectations now about the future trajectory of interest rates here in Australia.

“I don’t predict or pre-empt those decisions but the market is certainly now expecting multiple interest rate cuts over the course of the year, beginning in May.”

His comments came after the Australian Treasury released revised economic forecasts for the country in its Pre-Election Economic and Fiscal Outlook on Monday, in which it acknowledged that the increase in tariffs were “more significant than expected”, saying that the potential magnitude and persistence of the economic effects of these announcements had resulted in greater-than-usual uncertainty around the outlook.

“These tariffs, and other retaliatory responses, will weigh on international trade, investment and growth, and disrupt supply chains. This will have direct and indirect effects on the Australian economy,” it said.

“Abstracting from temporary factors, inflation is expected to sustainably return to the target band around the middle of 2025 ... Nominal GDP is expected to grow by 4¼ per cent in 2024–25. Nominal GDP growth is then expected to slow to 3¼ per cent in 2025–26 as a pickup in economic growth is offset by a moderation in domestic inflation and sharp fall in the terms of trade.

“Given the increase in tariffs announced last week was larger than expected, there is now more uncertainty around the outlook for economic activity, commodity prices and inflation. Over the past few days, there have been significant falls in oil prices and a depreciation of the Australian dollar. Both developments would have implications for activity and inflation if they were to persist. In addition, there have been significant falls in other commodity prices in recent days. If these lower commodity prices were to persist, this would have implications for nominal GDP and revenue.”

[Related: More rate cuts expected following US tariff storm]