- 04 Apr 2025
- By API Magazine
The Trump tariffs may or may not liberate the US economy but they could have lasting implications for the Australian economy, interest rates and property market.
It’s a confusing time to be an RBA Governor.
The United States’ application of blanket tariffs around the world has sent shockwaves through the global economy that will reverberate all the way through Australia’s economy and down to the national property market.
For Michele Bullock, at the helm of the Reserve Bank of Australia, deciding how to react to this chaotic economic landscape is far from clear-cut.
For the past couple of Monetary Policy Decisions that follow interest rates announcements, the RBA has been firm in its assertion that the global economic uncertainty lavished upon the world by Donald Trump’s unpredictability and tariff threats will deter it from cutting rates too quickly.
Prospective property buyers and homeowners with a mortgage are eagerly awaiting Ms Bullock’s reading of the situation.
The RBA’s view, up to now, has been that tariffs would add to the cost of goods, leading to inflationary pressure, and therefore negating the argument in favour of interest rate cuts.
It sounds simple enough. So why are markets now raising their collective expectations of an interest rate cut, not just on 18 May, but also another by August, and a third by November?
Before Trump launched a global trade war on Thursday (3 April, Australian time) financial market pricing had suggested there was a 70 per cent chance that the RBA would cut rates at its next get-together, after it held steady on 1 April.
But after the tariff plan was announced, those odds leapt to 90 per cent.
The reason? Well, countering the inflation theory is the one that sees the global economy lurching towards deflating growth or even recession. Outside the US, whose consumers are the ones footing the bill for the tariff explosion, the economic slowdown as trade volumes take a hit will slow global growth and, as a result, suppress inflation.
Bendigo Bank’s Chief Economist David Robertson acknowledged the juggling act facing the RBA Governor.
“Uncertainty around the impact of the tariffs makes the job of setting the cash rate much more complex,” he said.
“Australia is one of the least exposed to tariffs directly, given less than 5 per cent of our goods exports head to the US, so it will be indirectly, via our major trading partners, that we are likely to be most impacted.”
“Will global demand slow down sharply, meaning all the more need for RBA rate cuts?
“Recent forecasts from the RBA and the OECD do show slower growth ahead in the US and to a lesser extent the global economy, but not at this stage a slowdown for our major trading partners,” Mr Robertson said.
“This will be a key variable for the rest of the year and will depend on the degree to which countries retaliate to US tariffs, or perhaps seek more reliable trade partners elsewhere.”
Australia’s property market has already returned to a couple of months of capital growth following a few months of modest declines that put an end to a record breaking spell of median dwelling value increases.
That rate of growth could again take off if borrowers sense loan repayment pressures are about to ease. Investors in particular will be eyeing the gains to be made from mortgage savings when rents still continue to rise.
Rest of world leaning to rate cuts
If the RBA is seeking guidance from around the world, it will note that central banks elsewhere appear to be erring on the side of stagflation rather than rampant inflation, in a post-tariff world.
Investors in the UK are increasing their bets on interest rate cuts by major central banks in an effort to stave off a potential global recession. Futures markets suggest a reduction of approximately 60 basis points (bps) to the Bank of England’s benchmark Bank Rate by December. This marks an increase from the 54 bps expected just a day earlier.
In the Eurozone, investors have increased their bets on another rate cut on 17 April and now see a roughly 90 per cent chance of a downward move, to be followed by two more cuts later in the year, as inflation pressures dwindle as tariffs damage the economy.
The likelihood of the Bank of Japan, where a 24 per cent tariff was imposed by the Trump administration, pausing interest rate hikes is also increasing.
The China effect
No discussion about Australia’s economy in a global context is complete with a consideration of what the fallout will be in China.
The direct effects of the 10 per cent tariff on Australian goods exported to the US is likely to be small. The US is Australia’s fifth largest goods export market, with exports worth $34 billion in the 2023 calendar year. But that is overshadowed by $218 billion worth of exports to China and the noteworthy $90 billion worth to Japan.
China has copped a massive 54 per cent tariff imposition. The trade numbers between the US and Chinese economic behemoths are quite staggering. The US-imported goods from China in 2024 totalled $438.9 billion, up 2.8 percent ($12.1 billion) from 2023.
The saying used to be that if the US coughed, Australia caught a cold. Today, it’s more like, if China catches a cold, Australia is hospitalised with pneumonia.
China buys 32.5 per cent of everything Australia exports and is the clear number one trading partner. If the economy there shrinks, so does Australia’s. Japan is the second largest export market, at less than half the value of China’s expenditure.
Not only that, but Vietnam copped a 46 per cent tariff hit, Thailand 37 per cent, Taiwan 32 per cent, Malaysia 24 per cent and Bangladesh 37 per cent (while impoverished Cambodia was somewhat bizarrely slammed the hardest of all nations with a 49 per cent tariff).
Just as Australia said it would do, so too will the economies of southeast Asia.
Among the responses in Prime Minister Anthony Albanese’s five point plan for countering American tariffs, he said his government would provide $1 billion in zero interest loans for firms to take advantage of new markets and export opportunities.
The RBA will (presumably) be factoring in that other countries in our region will also be looking to unload their goods in markets outside the US, including Australia.
A flood of cheaper goods into Australia from southeast Asia would dampen inflation further.
And with that, likely hasten a round of interest rate cuts and subsequently add further fuel to a property market that has been teetering on the parapet between growth and price decline.
The ball is in Michele Bullock’s court.
Article Q&A
What do the Trump tariffs mean for the Australian property market?
Prospective property buyers and homeowners with a mortgage are eagerly awaiting the RBA’s reading of the tariff situation. Finance markets are now raising their collective expectations of an interest rate cut, not just on 18 May, but also another by August, and a third by November, which could fuel property markets.
How are central banks responding to the tariff increases?
Central banks elsewhere appear to be erring on the side of stagflation rather than rampant inflation, in a post-tariff world. Investors in the UK are increasing their bets on interest rate cuts by major central banks in an effort to stave off a potential global recession, while Europe and Japan are also betting on downwards inflation pressure.
