Perplexing tariff regime leaves economists scratching their heads
The majority of economists reckon another 25-basis-point interest rate cut is on the agenda for May, as US President Donald Trump pushed forward with his controversial global tariff regime.
According to an AFR poll, 29 out of 40 economists expect another cut when the Reserve Bank of Australia (RBA) convenes on 20 May. If their predictions are accurate, it would mark the second rate cut this year, bringing the cash rate down to 3.85%.
Each of the Australian Big Four banks – Commonwealth Bank, ANZ, NAB and Westpac – are predicting a May cut, with Westpac chief economist Luci Ellis recently saying: “We continue to think that further rate cuts are coming, with the next most likely in May when the RBA should be able to point to yet another pleasant surprise on inflation, just as it noted this meeting that wages growth had eased more than expected.”
Non-majors including AMP Bank, BOQ and Bendigo Bank have a similar expectation.
The outlook for rate cuts is intrinsically tied to inflation data.
While annual inflation dipped more than expected in the fourth quarter of 2024 (to 2.4% against market consensus of 2.5%), Trump’s sweeping tariffs have thrown a spanner in the works. Australia, however, got off relatively lightly with just 10% added to US exports.
The uninhabited (by humans) Australian territory of Heard and McDonald Islands also got hit with a 10% tariff. China, meanwhile, was slapped with 34% (on top of existing tariffs), the European Union 20% and Japan 24%.
Trump’s protectionist tariff policies have left global economists scratching their heads. Even hedge fund manager Bill Ackman, a slavish Trump supporter, has warned of an “economic nuclear winter” if the tariffs are not reversed.
He wrote on Twitter/X: “The President has an opportunity on Monday to call a time out and have the time to execute on fixing an unfair tariff system.
Alternatively, we are heading for a self-induced, economic nuclear winter, and we should start hunkering down.”
Trump, however, sees tariffs as a tool for onshoring the manufacturing industry back to US soil.
