Australia Holds Key Rate as World Braces for Trump’s Tariffs
Australia’s central bank kept its key interest rate unchanged in a widely expected decision, saying it wants to see more evidence that inflation is moving sustainably back to target before easing further.
The Reserve Bank’s board held its cash rate at 4.1% on Tuesday, a day before President Donald’s Trump’s “Liberation Day,” when he intends to impose tariffs on a number of countries. RBA Governor Michele Bullock will hold a post-meeting press conference at 3:30 p.m. Sydney time.
“The continued decline in underlying inflation is welcome, but there are nevertheless risks on both sides and the Board is cautious about the outlook,” the new monetary policy board said in a statement.
The Australian dollar was little changed at 62.56 US cents at 2:31 p.m. in Sydney, while yields on policy sensitive three-year government bonds remained inched higher to 3.70%.
Uncertainty surrounding Trump’s tariff plans, which have often changed and been subject to last-minute carveouts, have triggered fears they will disrupt supply chains and raise prices. Even if Australia — currently in an election campaign — avoids a direct impact, as a small, open economy it’s heavily geared to global activity and sentiment and likely to see some fallout.
Trump’s program has added uncertainty to an already clouded global outlook. Federal Reserve officials have warned that tariffs may be a significant roadblock to recent progress on inflation.
Domestically, data has been mixed — monthly figures showed Australia lost more than 50,000 jobs in February and an inflation indicator is now within the RBA’s 2-3% target. At the same time, consumer spending has picked up from last year’s lows and nationwide housing prices hit a record high in March.
Money markets are wagering a near-80% chance of an easing at the RBA’s May 19-20 meeting — after the May 3 election — though a cut isn’t fully priced in until July.
When the RBA’s board meets in May, the impact from tariffs will likely be clearer, it will have seen quarterly inflation data — the most comprehensive reading — and it will have updated staff forecasts.
One worry for policymakers is the extent of spending pledged ahead of what’s expected to be a tight election. The center-left Labor government last week unveiled tax cuts and other sweeteners in its annual budget that spent most of a windfall gain from high commodity prices.
Based on current polling, the most likely result is a hung parliament in which neither of the two major parties holds a majority. In such a case, they would need to negotiate with independent lawmakers to form government.
“A few independents will be manageable, but any more than five could slow down legislation,” Josh Williamson at Citigroup Inc. in Sydney said in a research note. “To win government the largest party will probably have to offer more spending.”
That could slow disinflation or even rekindle price pressures.
The RBA will publish its semi-annual Financial Stability Review on Thursday. The following week, on April 10, the governor will deliver a rare speech at an event for Chief Executive Women in Melbourne.
Source: Bloomberg
