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“Members agreed that future decisions would be guided by the incoming data and evolving assessment of risks”. This has been the talking point from the Reserve Bank of Australia (RBA) for the past several quarters regarding its decisions on monetary policy.
Indeed, the RBA has relied heavily on economic data, namely the quarterly Consumer Price Index (CPI) figures and Labour Force figures to inform its decisions, which according to Westpac’s chief economist Luci Ellis has made it “tricky to predict what the [board] will decide beyond the upcoming meeting”.
“You cannot be sure until you have seen the latest data,” she said.
“For example, had the 4Q24 trimmed mean inflation not surprised on the downside, the board would probably have remained on hold at the February 2025 meeting.”
However, the winds of change have blown dramatically in just a short amount of time, as economic turmoil abroad has “changed the game and flipped the risks” according to Ellis.
“You can lock in a 25bp cut in May, even if the Q1 inflation data are a shade disappointing,” she said.
Tariff turmoil
Indeed, one culprit – US President Donald Trump – has sent globe into a state of upheaval with his brash and sweeping tariff announcements, sending shock waves throughout global markets and evidently prompting our central bank to change its tune when it comes to monetary policy.
While Australia got off comparatively easy, only copping a 10 per cent baseline tariff on all imported goods, Trump has engaged in a tit-for-tat trade war with China, which has so far resulted in an almost comically staggering 145 per cent tariff on all Chinese imported goods, while China has responded with a retaliatory 125 per cent tariff on US goods.
However, on Wednesday (23 April), Trump did signal that this monstrous tariff would drop “substantially”, although he gave no indication by how much, only revealing that he believes a deal with China will occur “pretty quickly”.
How does this affect Australia?
Nevertheless, Australia’s close relationship with China and the impact of these tariffs have raised some alarm with our economists.
“[Uncertainty] has escalated to a whole new level and the risks have completely flipped,” Ellis said.
“Even though we do not expect the US administration to implement tariffs at the rates originally announced, some damage has already been done.
“Global growth – and especially US growth – will be slower; the response of China will be disinflationary for the world outside the US; and uncertainty is likely to delay decisions on some investment projects.”
Ellis said that it is for this reason that they have locked in a 25-bp cut to 3.85 per cent on 20 May.
Previously, the main concern from the central bank was that “a still-tight labour market would keep domestic inflation pressures stick,” according to Ellis, which posed the risk that the last 0.2 per cent of inflation, which represents the difference between the RBA’s February forecasts for trimmed mean inflation and its long-sought-after 2.5 per cent midpoint range, would not be eliminated.
Ellis said that holding rates steady during a time of global turmoil and softer momentum in the labour market “for the sake of 0.2 ppts of inflation” would be “very hard to explain”.
[RELATED: May meeting an ‘opportune time’ for RBA to revisit policy]
