Australia’s central bank has reduced its benchmark lending rates by 25 basis points, while also revising down the annual economic outlook for the nation.
The Reserve Bank of Australia has lowered its economic growth forecast for the year to 1.7 percent from 2.1 percent, stating that a weaker-than-anticipated increase in public demand in early 2025 is unlikely to be compensated for in the remaining months of the year.
The country’s benchmark rates now stand at 3.6 percent, the lowest level since April 2023, aligning with the expectations of economists surveyed by Reuters. The RBA indicated that inflation has fallen “substantially” since its peak in 2022, with increased interest rates bringing aggregate demand and potential supply “closer towards balance.”
RBA’s assessment of trade war risks
Australia’s S&P/ASX 200 equity index rose approximately 0.3 percent following the announcement, while the Australian dollar weakened by 0.15 percent, trading at 0.6501 against the U.S. dollar.
Inflation in Australia registered at 2.1 percent in the second quarter, marking its lowest point since March 2021 and approaching the lower end of the RBA’s target range of 2 percent to 3 percent.
Tuesday’s rate cut occurs amid a significantly altered trade landscape, as U.S. tariffs have been implemented, coupled with weaker-than-expected economic growth in the first quarter.
Australia faced the baseline 10 percent tariff imposed by U.S. President Donald Trump, which the country’s trade minister reportedly celebrated as a “vindication” for the government’s negotiation efforts.
The RBA noted that the risk of a “very damaging” trade war has lessened, and that “recent international trade policy developments have had little discernible impact on the Australian economy to date.” However, it cautioned that a more significant disruption to global trade cannot be completely ruled out.
The downward revision of the GDP growth forecast is attributed more to a declining outlook for productivity growth rather than trade disruptions, according to the central bank. The nation’s economy grew by 1.3 percent year on year in the first quarter, falling short of the estimated 1.5 percent growth indicated in a Reuters poll. On a quarter-on-quarter basis, the economy expanded by 0.2 percent, which was below the anticipated 0.4 percent growth.
Read more: Australian wage growth slows to weakest pace in a year as labor market cools
U.S. trade policies and Australia’s resilience
Recent reports from Vanguard’s economic outlook for Australia suggest that despite the uncertainty surrounding U.S. trade policies and global economic conditions, Australia’s low direct exposure to U.S. tariffs and its commodity-driven export profile help cushion the economy. Vanguard forecasts a slightly higher GDP growth near 2 percent for 2025, supported by anticipated policy easing and a cautiously dovish stance from the RBA. They also note that inflation will probably linger within the RBA’s 2-3 percent target band but may stay in the upper range in the near term, influenced by supply-side constraints and tight labor markets.
Additionally, the housing sector shows signs of resilience with increased activity supported by falling borrowing costs and easing regulations, which could provide some offset to the broader economic softness. This sector dynamic is an essential consideration in the RBA’s outlook and monetary policy decisions.
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