SYDNEY: US trade policies and nations’ responses to them could have a “chilling effect” on global business investment and household spending, though Australia’s financial system is well placed to weather such a storm, the central bank says in a half-yearly review.
“If downside risks to the global outlook materialise, they could spill over to some Australian businesses via trade linkages or tighter access to offshore funding markets,” the Reserve Bank of Australia (RBA) said in its Financial Stability Review released yesterday.
“Nevertheless, the strong financial positions of most households, businesses and owners of commercial real estate are likely to limit the risk of widespread financial stress.”
Earlier in the day, President Donald Trump imposed the steepest American tariffs in a century in a move that economists fear will drive a global downturn and rekindle inflation. The RBA’s report was prepared prior to Trump’s announcements.
For Australia, the direct impact from Trump’s reciprocal 10% tariff is likely to be small though the indirect impact from growing trade and investment uncertainty makes for a more dovish RBA, economists said.
Australia’s central bank kept its key rate unchanged at 4.1% this week, having cut for the first time in four years in February.
Money market pricing now implies at least three more cuts this year, with a 40% chance of a fourth.
“While this week’s steady rate decision and cautious tone suggests a more drawn out modest easing cycle than our base case for two more cuts in May and August, the global developments perhaps argue the opposite and also suggest a downside to this view,” said Su-Lin Ong, the Sydney-based chief economist at Royal Bank of Canada.
The Australian dollar, often traded as a liquid proxy for China, was the worst performing major developed market currency yesterday while the yield on policy sensitive three-year bonds fell the most since July.
In its review, the RBA warned that the Australian financial system’s resilience could deteriorate if lending standards weakened and households took on excessive debt in response to an actual or anticipated easing in borrowing costs. — Bloomberg
