Australia’s central bank, the Reserve Bank of Australia (RBA), issued a stark warning on Thursday regarding the potential impact of U.S. trade policies on the global economy. The RBA cautioned that the escalating trade tensions, particularly U.S. President Donald Trump’s recent tariff announcement, could exacerbate market volatility, heighten risk aversion, and increase financing costs for businesses worldwide.
The warning came as global stock markets took a hit following Trump’s announcement of new tariffs, sparking threats of retaliatory measures from various trading partners. In its semi-annual Financial Stability Review, the RBA highlighted that ongoing uncertainty surrounding U.S. trade policies could undermine both business and household spending, stoking fears of a slowdown.
The RBA’s 63-page report emphasized that the volatile global financial landscape could prompt “disorderly price adjustments” and lead to a rapid shift in risk sentiment. Such a shift could sharply raise borrowing costs for corporations, further straining financial conditions, especially in the non-bank lending sector.
Though the report was finalized before Trump’s tariffs were announced, it foresaw potential consequences for Australian businesses. Under the new tariffs, Australia would face a 10% levy on imports to the U.S., while China, its largest export market, could be subject to tariffs as high as 54%. A slowdown in China’s economy, the RBA noted, would compound long-standing financial vulnerabilities tied to the country’s real estate sector, which has yet to recover fully.
In response, the RBA predicted that China’s government may need to implement additional stimulus measures to support economic growth. However, such measures could further increase debt levels in certain sectors, adding strain to an already fragile financial environment.
Domestically, the RBA reported that Australian banks remain well-capitalized, and businesses continue to show resilience. Household financial pressures have eased slightly as inflation slows and interest rates fall. The RBA recently held interest rates steady at 4.1% following a rate cut in February, marking the first reduction in over four years. It is now awaiting additional data to determine whether inflation is on a sustainable downward trajectory, mindful that a strong labor market could drive up price pressures.
Market expectations indicate a 70% chance of another rate cut in May, with the overall easing forecast for this year increasing to 80 basis points, in light of the uncertainty surrounding U.S. trade policies.
The RBA also noted that while the proportion of borrowers at risk of falling behind on loan repayments has decreased to 3% from a peak of 5% in recent quarters, vulnerabilities could arise if looser financial conditions encourage households to take on excessive debt. Notably, home prices surged to record highs in March following the February rate cut.
The central bank emphasized that regulators will closely monitor any potential risks to the housing market that could emerge from the changing financial landscape, signaling a proactive approach to managing future economic uncertainties.
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