RBA interest rates: Financial markets are betting on swift relief this year amid warning to ‘tread carefully’

Panicked investors have bet on four to five rate cuts through to the end of December as analysts predict President Donald Trump’s massive tax hikes will batter the US economy.

That would take the official cash rate down to 2.85 per cent and mark a big change from the Reserve Bank’s cautious stance following a board meeting last week.

RBA Governor Michele Bullock said the full impacts of the trade war are not yet clear — and the central bank also warned Australia’s fight against inflation was far from over.

On Monday, the Aussie Dollar sunk to 60 US cents as investors jettisoned the commodity-focused currency. The S&P/ASX200 fell 4.1 per cent to 7,355 points after a dramatic fall in the opening hours.

Money markets also showed investors had been pricing in about four rate cuts this year.

It came as Australia’s Treasury revealed analysis showing US inflation would rise by about 1.4 percentage points thanks to Mr Trump’s taxes. Growth would slow and the world’s biggest economy will be about 0.8 per cent smaller in 2027 with the tariffs in place.

Australia’s economic pie would be about 0.1 per cent smaller thanks to the trade fight, with prices pushed up about 0.2 percentage points.

Treasurer Jim Chalmers reportedly said markets were increasingly predicting a rate cut in May after a series of “bad decisions” on tariffs.

But Judo Bank’s Warren Hogan cautioned against expecting big moves and said the RBA had “time on its side” before the next meeting in May.

“Central banks need to tread carefully here,” Mr Hogan said.

“There will be loud calls for emergency rate cuts, and other actions to support weak markets, but that is not their job.

“Unless the market fallout jeopardises the underlying economy, central banks need to be mindful of bailing out investors, particularly as inflation is lurking in the economy and is a direct consequence of tariffs.”

Others thought the pace of rate relief would pick up speed.

AMP chief economist Shane Oliver expected four or five rate cuts through 2025 — up from three prior to the tariffs.

He said the tariffs would amount to about $US600 billion and would be the biggest tax hike since 1968 at about 2 per cent of American annual income.

“The risk of a US recession was already rising with US households having run down their pandemic savings buffers and thanks to a further blow from the latest tariffs . . . to confidence and supply chain disruptions is probably 45 per cent.”

Mr Oliver said global growth would be about 1 percentage point lower, depending on retaliation and stimulus measures in countries including China.

“The US will be harder hit with threats to nearly all of its trade, whereas other countries only see their trade with the US tariffed,” he said.

ANZ head of G3 economics Brian Martin said the risk of a US recession had “escalated”.

Mr Martin said tariffs had been “worse than expected” and the effective tax rate for imports had lifted to a level not seen for 100 years.

“The speed and magnitude of the sell-off in stock markets and associated inversion of the US yield curve reflects intensified anxiety about rising prices, falling demand and supply-chain disruptions,” he said.

“Economic uncertainty has jumped,and that too can lead to reduced household consumption and business investment.”