MNI: RBA Rate On Track For Cuts, Trump Adds To Risk-Ex Staff

MNI (SYDNEY) - The Reserve Bank of Australia is likely still on track for an April or May 2025 cut, but inflation risks are to the upside and there is at least an outside risk it could still be forced to hike again given an outlook made more uncertain by the victory of Donald Trump in U.S. elections, former RBA staffers told MNI.

The RBA’s strategy of trying to preserve employment while simultaneously containing inflation has left it exposed to positive inflation shocks, said Mariano Kulish, University of Sydney professor and a former RBA senior manager, who has previously criticized the RBA for not hiking more aggressively.  

The Reserve now expects underlying CPI at the 2.5% midpoint of its target range by December 2026, and it will gauge the impact on Australia of Trump’s promised deportations, tax cuts and increased spending by means of economic data, Kulish said.

“First we need to see inflation going up in the U.S. – that will be a first signal,” he said, sketching out a scenario which could push the RBA off its present course towards easing. “The second signal will be for the [U.S. Federal Reserve] to actually change course… either pause or change direction.” 

While a mid-year 2025 cut appeared likely given the RBA’s most recent forecasts, the situation could change rapidly after Trump takes office in January, he continued, noting the Reserve should consider discussing the potential for positive inflationary shocks stemming from tariffs or global trade disruptions. (See MNI RBA WATCH: Governor Maintains Hawkish Language, Cash Rate) “The Bank will have to either start to telegraph that they'll hike, or stay where they are for much longer than markets expect. But my sense is that in the public discourse, the Bank is under pressure to cut.” 

Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist, told MNI that while a mid-year cut was still probable, the risks remained to the upside and the Reserve could push its easing out to the back half of 2025. "The risks are that it's later than that, rather than sooner. If it's sooner, then that means the labour market has gone pear-shaped."

IMPACT QUESTIONED

Trump’s policies would need to be “cataclysmic” to push the RBA to act, Langcake said. While tariffs could hurt China’s appetite for commodities, Australia was not a marginal supplier, he argued, noting Beijing would likely cut imports from other countries first during a downturn. 

“Those kind of exports don't have a huge bearing on our labour market, so there's a few layers of insulation there,” he continued . “Higher tariffs are more inflationary for the U.S. and that changes what the Fed does, but I don't think it needs to change what the RBA does. It's not about global inflation. It's the U.S. shooting itself in the foot.”

Trump’s policies may pressure the Australia dollar, but not enough to concern the RBA, he added. “If you were expecting the Aussie [dollar] to pick up over the next few years, then it doesn't make the RBA’s job any easier,” he noted. “But if you're expecting the dollar to stay where it is, at fairly depressed levels, then there's no change.”

While the Australian dollar has weakened about 2.5% against the greenback since the election, Langcake doubted the move reflected expectations of RBA action. "It could just be that traders expect the U.S. economy to run a bit hotter, U.S. export demand will be weaker, or the Fed will keep policy a bit tighter," he added, noting the stronger U.S. dollar could also reflect a typical safe-haven move due to the uncertainty.

“The impacts would be much larger on the nominal side than the real side of the economy,” he continued, adding Australia could see lower terms of trade, which would impact miners' profits and government revenue. “But those impacts would be larger than, say, the flow through to the labour market or export volumes for GDP growth.”

But Langcake conceded 2025 represented great risk and uncertainty as Trump's team revealed exactly how much of its agenda it was willing to implement.