RBA Rate Cut Possible Despite Eased US-China Tariffs

Economists are largely forecasting that the Reserve Bank of Australia (RBA) will reduce interest rates during its upcoming meeting, although recent international developments add some uncertainty to this prediction.

Notably, US President Donald Trump's decision to lower tariffs on China prompted a reciprocal tariff reduction by Beijing, leading to a rise in risk asset values, including shares.

The market's expectation for RBA interventions has slightly diminished with the release of favorable labor market data. The anticipated rate cuts by year-end have dropped from four to three. Nonetheless, traders are still nearly fully betting on a 25 basis point reduction from the current 4.1% cash rate on Tuesday.

A survey by Finder revealed that nearly 90% of economists expect a cash rate cut, with Sean Langcake of Oxford Economics Australia among the 41 experts supporting this outlook. While there are positive developments on the tariff front, Langcake pointed out potential economic harm from the ongoing uncertainty. Reduced inflation risks give the RBA more room to support the economy, he stated.

Australia's four major banks all predict a rate cut, with NAB speculating a potential 50 basis point decrease. However, analysts Andrew Ticehurst and David Seif of Nomura express skepticism about such a significant cut, citing recent improvements in the US-China trade relations.

The RBA is expected to announce updated quarterly economic forecasts on Tuesday, amid an otherwise quiet week for new economic data. Concurrently, the Victorian government will release its budget, as ratings agency S&P Global warns of potential credit rating downgrades for the indebted state if spending isn't curtailed.

US markets have responded positively to the tariff reductions, marking five consecutive days of growth last week. Similarly, Australian share markets reached a three-month peak after eight days of gains.

Published:Monday, 19th May 2025
Source: Paige Estritori

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