Treasurer Jim Chalmers pulled no punches on Monday, warning that escalating US tariffs are casting “a dark shadow over the global economy”, and although Australia is not uniquely impacted, it is far from immune.
“We’re well prepared,” Chalmers said. “But we are seeing very substantial volatility now in global stock markets and in our own markets as well.”
Amid that turbulence, traders have ramped up bets that the RBA will cut four times this year, with the likelihood of a full 50 bp cut in May now exceeding 50 per cent. Markets are pricing in a cash rate of 3.1 per cent by year’s end – front-loading what was once expected to be a more gradual easing cycle.
The driver? A rare instance where global forces appear to eclipse domestic data.
“Short of an off-ramp on US trade policy, we expect the RBA to cut 50 bps in May,” said Deutsche Bank’s chief economist, Phil O’Donaghoe.
“We then expect another 50 bps of cuts in H2, 25 bps at each of the August and November meetings, taking the cash rate to 3.1 per cent by the end of 2025. That is 25 bps more than we previously expected for this year, but our ‘terminal rate’ of 3.1 per cent is unchanged,” he added.
Although Australia’s direct exposure to US tariffs remains limited – manufactured goods make up less than 10 per cent of Australia’s export basket, and Australia faces only the baseline 10 per cent levy – the ripple effect through regional partners like China is more concerning.
The Australian dollar has dropped roughly 4 per cent on a trade-weighted basis over the past week.
“This is one of the few occasions in history where a global ‘shock’ outweighs prevailing domestic economic considerations,” said O’Donaghoe.
He highlighted the RBA had acted decisively in moments of global dislocation before, from the GFC to the pandemic, and as such, he expects history to rhyme.
The only current risk to Deutsche Bank’s forecast, he noted, is if the US decides to seek an off-ramp and either reverses or significantly reduces the tariffs it plans to impose.
While some headlines over the past 24 hours hint at potential negotiations with select trading partners, O’Donaghoe noted that the narrative around China has taken a sharper turn – with fresh threats to hike tariffs by a further 50 per cent unless Beijing rolls back its retaliatory measures.
“For the RBA, the choice is rapidly becoming less about inflation, and more about confidence. May’s board meeting may mark a pivotal moment,” the economist added.
Chalmers slams tariffs as a ‘series of bad decisions’
For his part, Chalmers said on Monday: “What we’re seeing here is the impact of a series of bad decision take about tariffs and the whole world is trying to get their head around the impact on their own economies and the global economy.”
The Treasurer on Monday also revealed fresh modelling which suggests Australia’s GDP is estimated to decline by 0.1 per cent and inflation to increase by 0.2 percentage points in 2025 relative to a baseline scenario with no tariffs.
“Over the medium-term Australia’s GDP is permanently lower, while the effect on inflation is temporary,” the document reads.
The document noted that while the direct effects of the US tariff changes are expected to be small, “most of Australia’s exposure to US tariffs comes from reduced demand for Australian exports from major trading partners including China, Japan, South Korea and India”.
