Tariff turmoil reshapes cash rate outlook

The new forecast, made on Thursday (10 April), came hours after US President Donald Trump unveiled a 90-day pause on plans to hike tariffs on most countries except China, a dramatic U-turn after days of market turmoil and recession warnings.

In a monetary policy update by NAB group chief economist Sally Auld and head of Australian economics Gareth Spence, the bank’s economics team said: “Headwinds from the global environment have intensified, but error bounds around our forecast are large given uncertainty remains exceptionally elevated”, adding that it expects a larger policy response is required to keep activity on track

“Much has changed since the RBA Board last met in early April. Risks to both global and domestic growth have shifted to the downside. Against this backdrop, a restrictive policy stance in Australia is no longer appropriate, in our view.”

Commenting on the impact of tariffs, NAB economists said: “Though we expect the direct impact of tariffs on Australia to be small (with the US a relatively small goods trading partner), we are not immune from the indirect impacts.

“For Australia we see the key impact on activity being driven by three channels: first, consumer and business confidence; second, potential national income and wealth impacts from weaker commodity prices; and third, volatility in financial markets.

“Managing the risks associated with each of these channels argues for a shift to a more pre-emptive policy response by the RBA.”

Referencing the uncertainty around tariffs, NAB’s economics team said: “We would also note that the situation remains quite fluid at present; hence there are large bands of uncertainty to our modal forecasts.

“Should the likely tariff regime in the US settle at a less severe outcome, then the RBA may have scope to consider a more gradual policy adjustment.”

Prior to the 90-day pause on tariffs on Australia, expectations had been rising that the RBA would hand down a bumper cash rate cut at its next meeting on 20 May.

ANZ moved its rate forecast on Friday (4 April), predicting 25 bps cuts in May, July, and August, saying: “We do not rule out a 50bp cut in May if sentiment sours and the global growth outlook deteriorates sufficiently.”

After the tariff pause was announced, ANZ senior economist Adelaide Timbrell told The Adviser that the lender remained comfortable with its forecast, noting that expected cuts would “be enough for the Reserve Bank to feel comfortable adding some insurance easing going from what we would consider the current cash rate to be unambiguously restricted, to a cash rate of 3.35 per cent by August, which we would consider to be mildly stimulatory”.

Looking ahead, Timbrell added: “The main risks to the Australian economy are not coming domestically. They're coming globally.

“So when we think about the RBA easing cycle right now, we're looking more closely at changes in global uncertainty, global trade and global growth, and less at small changes from the domestic economy,” she finished.

Phil O’Donaghoe, economist at international investment bank Deutsche Bank, initially said that the RBA would reduce rates by 50 bps at its next meeting.

However after the US administration announced a pause on tariffs, Deutsche Bank reverted to its previous call for a 25bp cut in May, followed by 25bp cuts in August, November and February.

O’Donaghoe said: "Our general conviction around the path for lower RBA rates has increased. The US tariffs still in place on China will - if sustained - significantly weigh on Chinese growth. Coupled with a 10% 'universal' tariff on other countries, that will still weigh materially on the RBA's assessment of the global growth backdrop.

"At the same time, the 'new' tariff regime will still likely prompt a disinflationary redirection of globally traded consumer goods from the US to Australia and other non-tariff consumer markets," he concluded.

Speaking at Election 2025, an event in Sydney after the tariff pause was announced, AMP chief economist Shane Oliver said he expected a rate cut in May.

AMP was initially forecasting two cuts this year but now expects it could be four.

“I think this is 50 per cent chance - probably a little bit less this morning - that it could be a 50 basis point cut at the May meeting," Oliver explained.

"But I think we will see a cut in May and there’s a good chance we will see several more cuts this year. We were thinking two but it could be four given the damage caused [by tariffs upheaval]."

He added: “So, I do think we will cut in May, 0.25 or possibly 0.5, depending on what happens with Trump, but I don't buy the argument that we should immediately have an emergency RBA cut [as suggested by the Australian Greens], that'll scare people,” Oliver finished.

Tariff uncertainty continues

Westpac and Commonwealth Bank (CBA), which were both forecasting a rate cut in May, confirmed that they would not be changing their cash rate outlook despite changes to tariffs imposed by the US.

Financial markets were left reeling after Trump announced a raft of global tariffs on Thursday (3 April) – including a 10 per cent tariff on Australian goods – which caused widespread disruption on global markets and triggered revised economic forecasts for Australia.

While the direct impact to Australia’s economy from the event is expected to be minimal (around 0.15 per cent drop in GDP growth, according to some economists), concerns are focused that the resulting trade war will likely slow down the global economy, especially in China and Asia, meaning less demand for Australian exports and hindering expected economic recovery.

Federal Treasurer Jim Chalmers said after tariffs were initially announced that Australia was “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".

[Related: Expectations rise for 50-bp rate cut in May]