The Reserve Bank of Australia (RBA) has assumed a highly favourable outcome for China over its forecast period, according to Tim Toohey, head of macro and strategy at Yarra Capital Management.
Toohey noted that the RBA has diverged from its typical use of consensus forecasts, and instead, has applied its own judgement in assessing the outlook for major global economies.
“In doing so, it is clear that the RBA has adopted the view that the tariff impact on economic growth will be almost exclusively be borne by the US economy – economic growth was reduced by 50 percentage points in 2025 and 2026 – with very modest adjustments made to China and Australia’s major trading partners,” he said.
This effectively positions China as a relative winner from the ongoing trade war, at least within the forecast horizon, according to Toohey.
In effect, the RBA is now making what Toohey described as “key captain’s calls” in framing its policy outlook, including the assumption that Chinese economic growth remains resilient and that the spillovers from global trade uncertainty have only a limited impact on Australian economic demand.
At the same time, the RBA has assumed that the imposition of US tariffs will lead to a redirection of discounted Chinese goods into the Australian market, which helps to dampen domestic inflationary pressures.
“But it’s worth asking: what if China doesn’t fare as well as the RBA’s base case?” Toohey added.
If China’s growth weakens relative to the RBA’s base case, the central bank’s assumptions imply that Australia would experience more significant negative spillovers and a stronger disinflationary effect due to an influx of excess Chinese goods.
In that scenario, Toohey suggested that those who believe the RBA is being overly optimistic about China should expect a deeper trajectory of interest rate cuts than what is currently implied by futures markets.
The RBA’s confidence in China was on full display during deputy governor Andrew Hauser’s speech at the Lowy Institute following his recent visit to China.
According to Hauser, China has confronted trade tensions with the United States from a position of economic strength. Moreover, he noted the “striking confidence” in China’s capacity to sustain growth targets in the wake of Donald Trump’s so-called “Liberation Day” tariffs.
However, this confidence is in spite of the RBA’s vigilance towards “increased uncertainty in the global economy” as mentioned in the Statement on Monetary Policy for May 2025.
“These developments are expected to have an adverse effect on global economic activity,” the board stated. “This has also contributed to a weaker outlook for growth, employment and inflation in Australia.”
Governor Michele Bullock further elaborated the RBA’s alertness to global economic shocks during her post-meeting press conference on 20 May.
Five rate cuts on the cards
Looking forward, Toohey expects the RBA to reduce interest rates by 25 bps in July, August and November, before cutting again next year to bring the nominal cash rate to 2.6 per cent by August 2026.
This is off the back of the central bank having lowered its estimate of the neutral interest rate to as low as 0.25 per cent as of February 2025 – 75 basis points below previous guidance – in a move he described as a significant policy shift with major implications for asset markets.
“It suggests first that the journey to neutral has been charted, and secondly, that that journey is much further than the RBA had been suggesting previously,” Toohey said.
“As a consequence, we have added two additional rate cuts in 2026 to our RBA forecasts.”
