Trump trade uncertainty raises hopes of more rate cuts

[Pelican Press 0]

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Trump trade uncertainty raises hopes of more rate cuts

Mortgage holders can expect more rate cuts this year as the Reserve Bank tries to predict where Donald Trump’s tariff “rollercoaster” is headed next.

There was little doubt about the RBA’s decision to slash the cash rate to 3.85 per cent on Tuesday.

Markets had fully priced in the central bank’s second interest rate reduction of 2025 ahead of the board’s meeting given inflation is back in the target band and a global trade war threatens the economy.

And futures traders were even more certain of further cuts after governor Michele Bullock’s revelations that the board considered a bumper 50 basis point cut.

The market was pricing in almost three more cuts before the end of the year, which Ms Bullock did not push back against, unlike after the board’s first move down in February.

Monetary policy was still restrictive, meaning the RBA had leeway to cut the rate further if inflation continues to ease, Ms Bullock said.

But the glide path down depends on developments overseas.

“It’s been a complete rollercoaster,” Ms Bullock said of the US president’s ever-changing tariff pronouncements.

The bank had been “completely blown out of the water by the scale and the scope”, she conceded.

While it was a “confident cut”, Ms Bullock said future moves were uncertain.

In the bank’s worst-case scenario forecast, in which all countries including Australia retaliate with higher tariffs, inflation would fall to the bottom of the RBA’s target band.

That would necessitate more rate cuts than the baseline scenario of three more by early 2026.

But in a more optimistic scenario, where tariffs are lowered to 2024 levels, inflation would remain higher.

That means less rate cuts.

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