MNI POLICY: RBA Trade Concerns Abate, Focus On Domestic Market
The Reserve Bank of Australia is more sanguine about the risk of a global slowdown than it was in May when it cut the cash rate by 25 basis points to 3.85%, with any trade-related impacts likely to take time to materialise domestically and as China shows resilience, MNI understands.
While May’s Statement on Monetary Policy presented a range of risk scenarios, including a 3% fall in GDP if U.S. tariffs were maintained, prompting a downgrade to central forecasts, officials now expect any fallout to be delayed, allowing renewed focus on domestic conditions at the next two policy meetings and in the August forecasts. (See MNI RBA WATCH: Board's Dovish Turn Included Debate Of 50bp Cut)
Importers bringing forward orders ahead of the July tariff deadline have supported global trade volumes, insulating Australia from immediate disruption. U.S. retailers are also expected to hold prices steady until the September quarter as they work through existing lower-cost inventory.
So far, the RBA has not observed significant declines in business or consumer sentiment that would suggest serious spillover effects from U.S. trade policy. Washington’s recent retreat from some of its more aggressive measures in response to market pushback has also eased near-term risks.
China, Australia’s largest trading partner, continues to show resilience. Although Chinese officials have acknowledged the potential drag from trade tensions, they remain committed to achieving the 5% GDP growth target – which the RBA believes will help preserve demand for Australian commodities.
PRODUCTIVITY GROWTH
Nor do warnings of a continuation of weaker-than-expected productivity growth over the next 18 months necessarily imply a risk to the RBA’s inflation target, with officials calculating that the resulting lower supply and demand would work to offset each other.
Though slower productivity reduces supply, it also dampens income and wage growth, which in turn softens demand and limits inflationary pressure.
While weaker productivity may not immediately affect inflation, it slows growth and leads to lower employment than otherwise. Despite the labour market’s resilience over the past two years and weaker-than-expected productivity, the RBA sees its missed GDP forecasts as more critical to its evolving inflation outlook. Growth has not picked up as the Bank anticipated and this has fed through to other elements of its projections.
The RBA forecasts productivity growth to reach 0.9% by December and 1% by the end of 2026. However, several former RBA economists have called that projection overly optimistic and warned it could jeopardise the Bank’s broader inflation target over time. (See MNI: Weak Productivity To Cramp RBA's Easing Path - Ex Staff)
The monetary policy board will meet on July 8, with markets pricing in a 95% chance of a 25bp cut to cash rate.
