Speaking at an Economic Society of Australia lunch in Brisbane on 3 June, Hunter outlined the implications of global trade tensions, emphasising the short-term effects of tariff policy on inflation, household demand and business investment.
“Economic theory and evidence suggest that higher global tariffs will put a drag on the global economy,” she said.
“This is true in both the short and long run, though here I’ll focus on the short run as that is what is most relevant for monetary policy.”
Hunter explained that for countries imposing tariffs, these act as a tax on imports, raising the price of goods unless counterbalanced by lower profit margins from overseas producers or currency adjustments.
“Higher import prices will mean less imports and shifts in demand towards locally produced products,” she noted.
However, she cautioned that such shifts take time, and that domestic production often cannot immediately replace imported goods, particularly raw materials. As a result, prices tend to remain elevated in the short term, which reduces households’ purchasing power and curbs business investment incentives.
“Collectively, domestic demand in the tariff-imposing country falls, all else equal,” Hunter said. “If households expect the tariffs to have a sustained effect on economic growth, and so their future incomes, they may also cut back further on spending…”
Countries facing these higher tariffs also experience reduced export demand, which diminishes broader economic conditions.
Hunter referred to China’s response as one example, highlighting the country’s likely reliance on expansionary fiscal policy to support domestic activity.
“But for both sets of countries, any net weakening in demand growth will spill over to their trading partners,” she added.
Hunter further pointed to the possibility of downward pressure on prices of globally traded goods.
“For countries that are not imposing higher tariffs, such as Australia, this could flow into import prices, making products cheaper and lowering inflation.”
In particular, Hunter drew attention to how US-China trade tensions could redirect Chinese exports to other countries, potentially lowering prices due to China’s dominant role in global manufacturing.
However, Hunter cautioned that this benefit may be offset, stating that the broad-based nature of tariff increases and non-tariff barriers (such as export bans) could “create a new bout of supply chain disruptions”.
By raising the costs of inputs such as machinery, commodities and components, global tariffs could lift production costs and, in turn, push up consumer prices, especially for complex goods like cars.
Despite these risks, Hunter stated that the RBA’s current baseline scenario assumes weaker global growth will slightly reduce prices for tradable goods.
“We expect weaker demand to outweigh the inflationary impact of any supply chain disruptions,” she added.
In regard to how the unpredictable and uncertain global environment will transmit through domestically, Hunter bluntly stated: “The short answer is we can’t be completely sure.”
According to the RBA, the baseline forecast for global developments are expected to dampen Australia’s economic growth and the labour market, while modestly reducing inflation to around the middle of the central bank’s coveted 2-3 per cent target range.
“This forecast is based on several judgements, and assumptions about the potency of the transmission channels I have discussed…” Hunter said.
“These include how tariff policies evolve, how fiscal and monetary authorities around the world respond, whether trade diversion reduces the price of imports or global supply chains become heavily disrupted, and how much uncertainty weighs on economic activity.”
She added that the RBA has used scenario modelling to guide its decisions, which led the board to cut the cash rate by 25 basis points.
Indeed, the Reserve Bank outlined two global scenarios to gauge potential domestic impacts in the RBA’s May SoMP; a “trade war” scenario, and a “trade peace” scenario.
The former would see GDP shrink in early 2027, an unemployment rate of around 6 per cent and an inflation rate of 2 per cent by the middle of the year.
Meanwhile, a “trade peace” circumstance would see vigorous recovery in domestic demand relative to baseline forecasts, including a "re-emergence of the concerns outlined in the February [SoMP] of excess demand in the labour market and the economy, leading to inflationary pressures".
