US. President Donald Trump’s threat of European tariffs may strengthen the case for a hold in rates. Picture: Getty Images
ANALYSIS
US President Donald Trump’s warnings to raise tariffs on Europe amid a stoush over Greenland could play a crucial role in the outcome of the Reserve Bank’s next meeting to decide rates.
And it could mean a widely predicted hike in rates in February could be delayed until later in the year.
The US President has threatened to raise tariffs on goods from eight European countries amid tensions over Greenland, raising the spectre of a transatlantic trade war weeks before the RBA’s February interest rate meeting.
What was shaping up as a nailbiting call on rates could now be tilting in favour of a hold, as global instability clouds the economic outlook.
The Reserve Bank will next meet to discuss rates in early February. Picture: John Appleyard
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The ASX rates tracker, which measures market expectations of a change in the official cash rate set by the RBA, is currently indicating a 75 per cent chance of rates being kept on hold.
This is down from a 64 per cent chance of a hold at the start of the month.
Only weeks ago, two of Australia’s big four banks were tipping a February rate hike, pointing to higher than expected inflation that, although coming down, remains above the target band of the central bank.
Mortgage brokers also told The Daily Telegraph that the general expectation from mortgage applicants was that rates would soon rise.
But Trump’s renewed tariff threats, and the shockwaves they could send through global trade, financial markets and business confidence, may have changed the outlook for rates.
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Greenland has been at the centre of the transatlantic rift. Picture: Sean Gallup/Getty Images
Markets are already jittery. Any escalation between the US and Europe risks hammering global growth, pushing up costs for businesses and disrupting supply chains.
Of course, it’s worth noting that Donald Trump has a reputation for backing down on tariff threats and there is a chance that tensions may simmer down, but it does make a hold in rates the safer option.
For the RBA, the prospect of a trade war between two of Australia’s largest trading partners is a nightmare scenario.
A global slowdown triggered by tariff retaliation could dampen demand and tighten financial conditions without the RBA lifting a finger.
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Reserve Bank Governor Michele Bullock will have plenty to consider at the next February monetary policy decision. Picture: John Appleyard
Nerida Conisbee, the chief economist at Ray White Economics, said the argument for a rate hike as early as February may have been problematic even before global tensions soared.
Tariff threats could “strengthen” the case for a hold, she said.
“I don’t think the economy is firing as much as people think and a hold in rates is likely,” she said.
“Inflation is still high but it has come back down a little. And we don’t know what will happen with employment. A lot will depend on unemployment data, which comes out (Thursday).”
HSBC chief economist Paul Bloxham also expected the RBA to hold off on raising the cash rate, pointing to weaker economic growth.
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