RBA Predicts Impact of Trade Dispute as Interest Rate Decreases Offer Relief

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Interest rates have been cut for a second time this year, to their lowest since 2023, and future rate cuts could be on the cards.

Treasurer Jim Chalmers said the Reserve Bank of Australia’s (RBA) decision to cut the cash rate to 3.85 per cent from 4.1 per cent will mean someone with a $750,000 mortgage will save $118 a month in reduced repayments

Chalmers said on Tuesday: “This is the second interest rate cut in the last three months. This is very welcome relief for millions of Australians.”

“We are really pleased to see more help is on the way.”

A graph showing interest rates in Australia

How interest rates have risen and fallen in Australia

When asked about potential future cuts, Chalmers said: “The market has expected for some time that there would be multiple interest rate cuts this year.

“That is a matter for the independent Reserve Bank, and it’s a matter for the market and for the economists to make those sorts of assessments.

“The market expects there to be further interest rate cuts, but market expectations change over time.”

The RBA said there was uncertainty about the world economy, saying in its statement following Tuesday’s rates decision: “There is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries.

“The Board evaluated a potential severe downturn and acknowledged that monetary policy is adequately positioned to take decisive action in response to global events, should they significantly impact activity and inflation in Australia.”

Table showing how the rate cut could impact home loan repayments

What the rate cut could mean for borrowers.

In the RBA’s latest quarterly Statement of Monetary Policy, released on Tuesday, the central bank has modelled the impact of ‘trade war’ and ‘trade peace’ scenarios on GDP, unemployment and inflation.

Under the trade war scenario, in which trade conflicts brought about by US tariffs escalate and lead to a protracted trade war, growth “slows sharply”, GDP would be 3 per cent lower than the baseline forecast, and unemployment rises to 6 per cent.

The bank also warned a protracted trade war could fuel global inflationary pressures.

Under the trade peace scenario, there is a swift resolution to trade conflicts resulting in potential increased demand for goods and services in Australia. The bank warns this could potentially fuel inflationary pressures and further expected rate cuts may not follow.

Governor Michele Bullock told reporters: “The key point about the situation we’re in is it’s not just uncertain, it’s actually unpredictable.”

“And so I think in terms of our focus, part of the reason … we put those scenarios in was to demonstrate that the range of outcomes here could be quite wide.

“I’m not putting a strong possibility on a really, really bad outcome, but I think we have to be alert that there might be.”

On trade with the US, Chalmers said: “We engage wherever we can and whenever we can, because this relationship is of mutual economic benefit.”

“We’ve got a lot of skin in the game when it comes to these escalating trade tensions.

“Our gross debt position is better than the US. Our budget balance is better than the US. We’ve got the triple-A credit rating from all three of the agencies.

“The US have just been downgraded by Moody’s [credit rating company].

“We’ve got lower unemployment here, we’ve got stronger employment growth here, and we’ve got lower interest rates here in Australia as well, at the same time as we’ve got similar levels of inflation.

“And so that comparison, I think, is another reminder that Australia is especially well placed and well prepared to deal with all this global uncertainty.”