Aussie borrowers have been told to downplay their expectations of mega rate cuts – despite concerns about Donald Trump’s tariffs.
The Reserve Bank last month cut interest rates by 25 basis points, taking them down to 3.85 per cent for the first time since June 2023.
But the minutes of that May 20 meeting have revealed that while a bigger 50 basis point cut was considered, this was considered unwise for now because the effects of American tariffs had yet to be felt.
‘They agreed that developments in the domestic economy on their own justified a reduction in the cash rate target and that the case for that action was strengthened by developments in global trade policy,’ it said.
‘However, members were not persuaded that the combination of these was sufficient to warrant a 50 basis point reduction at this meeting.’
The Reserve Bank hasn’t cut rates by 50 basis points since May 2012, when the Greek debt crisis was weighing on global growth.
The RBA’s latest meeting minutes were released on Tuesday, just days after Trump doubled tariffs on Australian steel from 25 per cent to 50 per cent.
It noted that earlier US tariffs, including 10 per cent on most Australia exports, were yet to affected the domestic economy.
Aussie borrowers have been told to downplay their expectations of mega rate cuts – despite concerns about Donald Trump ‘s tariffs
‘Members noted the absence of signs in the Australian data to date that global trade policy uncertainty was having a significant negative impact on the economy, and that some plausible adverse scenarios could see upward pressure on inflation,’ the Reserve Bank said.
The Trump tariffs would make American goods more expensive if components have to be imported.
But punitive tariffs on China could also see cheaper goods dumped on the Australian market that would otherwise have gone to the US, potentially reducing domestic goods inflation.
The futures market is now only expecting a 25 basis point rate cut at the RBA’s next meeting in July, which would be occurring before the release of June quarter inflation data.
Most economists are expecting the next move to be occurring in August, but with another quarter of a percentage point easing.
Financial markets are predicting the RBA cash rate will fall to 3.1 per cent by the end of 2025, for the first time since February 2023.
That would imply three more rate cuts to the existing 3.85 per cent cash rate.
But even with three more cuts, the RBA cash rate would still be above the 2.8 per cent level deemed to be neutral, where the Reserve Bank’s monetary policy was neither seeking to expand nor slow the economy.
The Reserve Bank last month cut interest rates by 25 basis points but the minutes of that May 20 meeting have revealed that while a bigger 50 basis point cut was considered (pictured is Governor Michele Bullock)
‘They also judged that it was not yet time to move monetary policy to an expansionary stance, taking account of the range of estimates involved, given that inflation was yet to return sustainably to the midpoint of the target range and the staff’s assessment that the labour market was still tight,’ the RBA minutes said.
Unemployment is still low at 4.1 per cent and the Fair Work Commission’s latest 3.5 per cent increase in awards and the minimum wage for 2.9million workers could see other workers bargain for higher wages.
While both measures of inflation are within the Reserve Bank’s two to three per cent target, the underlying, trimmed mean measure of 2.9 per cent is still above the midpoint of 2.5 per cent.
Weak productivity growth could also revive inflationary pressures if wage costs have to be passed on to customers to cover weak increase in output.
But the Reserve Bank minutes noted it wasn’t concerned about pay rises feeding into higher inflation, with wages across the Australian economy growing by 3.4 per cent in the year to March.
‘As expected, wages growth had increased slightly in the March quarter, owing to some administered wage decisions and new agreements coming into effect, but it remained lower than a year earlier,’ it said.
‘Members observed that the rate of voluntary job turnover had declined and that, anecdotally, the focus of wage bargaining and employment disputes had tilted in favour of workers seeking greater job security.
‘Some questioned whether this might see wages growth slow more noticeably than currently forecast.’
