A China and US Trade Beef: An Australian Perspective
23 April 2025
- Written by Christian Brehm
- Date 02 April 2025
- Category News
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New Look Board, Same Cautiousness
The RBA left the official cash rate unchanged at 4.1%
This meeting marked the first meeting of the RBA’s new Monetary Policy Board (MPB). In line with previously announced changes, the RBA has now split the RBA Board into the MPB and the Governance Board. The change brings a new level of focus and outside expertise to monetary policy.
Despite the changes, the new Board will likely retain the old Board’s cautiousness. And there is much to be cautious about! While monthly CPI showed a further easing, the impact of US tariffs needs to be watched closely.
What the RBA’s Statement said
“Recent information suggests that underlying inflation continues to ease in line with the most recent forecasts published in the February Statement on Monetary Policy. Nevertheless, the Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis. It is therefore cautious about the outlook.”
“Private domestic demand appears to be recovering, real household incomes have picked up and there has been an easing in some measures of financial stress.”
“Uncertainty about the outlook abroad also remains significant. On the macroeconomic policy front, recent announcements from the United States on tariffs are having an impact on confidence globally and this would likely be amplified if the scope of tariffs widens, or other countries take retaliatory measures.”
Statement by the Monetary Policy Board: Monetary Policy Decision, 1 April 2025.
https://www.rba.gov.au/media-releases/2025/mr-25-10.html
What the governor said at the press conference
“Despite the global news and associated uncertainty since the February meeting, the domestic economy has evolved broadly as expected.”
“One of the things we are cautious about is that policy unpredictability overseas could lead to slower growth, the implications for inflation here though, in Australia, are less clear.”
“We are paid to worry, to analyse and make judgements as new data come in and as the environment evolves”
“… we have made good progress on bringing inflation down and keeping unemployment low. This is a good position for the economy to be in as we approach a period of uncertainty”
“Wev’e been thinking about what the response of Chinese authorities may be, and if they continue to add fiscal support then it might be the impact on Australian activity [from US tariffs] … might be relatively muted.”
“The exchange rate is a bit of a buffer for us so when we get hit by lower commodity prices or a slowing world economy, the exchange rate helps us to adjust a little bit.”
“There are still risks on both sides, but as every month goes by and we get more information and it’s in line with where our forecasts are we get more confident”
“We are not forecasting a recession in Australia over the next 12 months”
Inflation is looking good but not good enough
While the RBA is keenly waiting for the March quarter inflation data to be released on April 30, the less accurate monthly inflation indicator suggests that inflation continues to ease. CPI fell from 2.5% in January to 2.4% in February on a yearly basis. The RBA’s preferred measure, the annual trimmed mean, fell from 2.8% to 2.7% (see chart below).
However, while inflation continues to ease, it is still not falling as fast as the RBA would like, which is why the RBA has left its interest rate at its current restrictive level.
Tariff uncertainty
A big point of discussion at the governor’s press conference, and in the board meeting itself according to Bullock, was the uncertainty over US tariff policy and their global impact.
Bullock revealed that the RBA has been working on a range of scenarios with respect to tariffs and has even swapped notes with other central banks in other small open economies - we’re looking at you New Zealand and Singapore!
Australia’s recent prosperity has been built on the bedrock of free trade. A global trade war will thus hurt Australia. How much it hurts will depend more on the impact on Chinese economic growth than on the direct impact of US tariffs on Australian exports. China is Australia’s largest export partner, with Australian exports to China nearly 7x the value of Australian exports to the US.
If China is able to use its exchange rate and stimulus to weather US tariffs, Australia will fair much better than counterparts such as Canada. Time will tell but with March having the highest official PMI for Chinese manufacturing in a year, early signs are positive.
"The official PMIs suggest that infrastructure spending is ramping up again and that exports have so far remained resilient in the face of U.S. tariffs," Julian Evans-Pritchard, Capital Economics, head of China economics.
The impact on inflation from tariffs is likely to be a one-off, what Bullock called a “level shift in prices”. However, given that Australia has not responded with retaliatory tariffs on the US, it is unclear whether the shift will be upwards or downwards. Some imports may become more expensive because of tariffs on their intermediate inputs but Australia may also benefit from some cheaper imports as some trade is diverted away from countries with tariffs.
NAIRU nerves
On Monday 24 March, the RBA released information on its estimation of NAIRU (Non-Accelerating Inflation Rate of Unemployment) in response to a freedom-of -information request from the public. This was important given the RBA’s recent talk on the tightness of the labour market and its uncertainty over whether it thinks it is inflationary or not.
NAIRU is a theoretical threshold dreamed up by economists. If unemployment is below NAIRU then there will be upward pressure on wages and inflation while the reverse is true. At NAIRU, inflation is stable.
The RBA revealed that its models currently have NAIRU at 4.69% in March with the bank generally assuming 4.5%. In both cases, this is clearly higher than the current unemployment rate of 4.1% seasonally adjusted. So, theoretically, the RBA is assuming that the current labour market is inflationary.
However, as Bullock admitted last and this meeting, there is no evidence that the labour market is pushing up wages and inflation. Wages are actually coming down. Either, we believe that the pandemic has had a fundamental structural impact on the labour market or that NAIRU is actually less than 4% and the labour market is actually deflationary. I believe that we are probably around NAIRU given that wages growth is falling and that the pandemic did have a structural impact.
“I wouldn’t put a number on any unemployment rate or anything like which would indicate that we would ease rates…” Michele Bullock.
Budget blah
The federal government handed down its annual budget on March 25 and two days later announced the date for this year’s election: May 3.
Given strong public spending over the last few years and the increase in public employment, you would expect the RBA to be a little nervous about an “election budget”. No! According to the RBA, the budget was just more of the same and in keeping with its February forecasts of public demand. As the chart below shows, public demand is expected to slow this financial year and for the following year. The risk to inflation seems to be decreasing.
“What we have got at the moment is the private sector relatively weak and the public sector filling a bit of a gap there and we’re still seeing inflation come down and unemployment hold up.” Michele Bullock.
Australian Private Debt Market
Australia still looks good for a soft landing and may suffer less than many other small-open economies when it comes to US tariffs, if China implements expected countermeasures. The Australian economy thus remains attractive and may increase in relative attractiveness as the global economy weathers US tariffs.
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