Donald Trump‘s trade war with China could see the Reserve Bank slash interest rates up to five times in 2025 as falling iron ore prices threaten government revenue.
China, Australia’s biggest trading partner, is being smashed with new 125 per cent tariffs after it responded in kind by hiking duties on American imports to 84 per cent.
The futures market is now expecting the Reserve Bank to slash interest rates from 4.1 per cent now to 2.85 per cent – a level last seen in December 2022.
That could mean five 25 basis point rate cuts at the RBA’s May, July, August, September and November meetings.
But a super-sized rate cut of 50 or even 75 basis points on May 20 is now regarded as a real possibility, which could see the generous relief delivered even sooner with fewer rate cuts.
A borrower with an average $600,000 mortgage would save $473 on monthly repayments should the RBA slash the cash rate this year by 125 basis points.
In an extraordinary turn of events, the Australian share market was 5 per cent firmer during the first hour of trade.
This added $139billion to the benchmark S&P/ASX200, partially recouping the steep losses of Monday and Wednesday.
Donald Trump’s trade war with China could see the Reserve Bank slash interest rates up to five times in 2025 as falling iron ore prices undermine government revenue (the American President is pictured with Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick)
Moomoo market strategist Jessica Amir said Trump’s pause on tariffs, outside of China, had buoyed Wall Street with the S&P500 soaring 9.52 per cent.
‘Happy days, right? Well, just be cautious. It’s just a pause, not a ban,’ she said.
‘Negotiations are expected to take place, with Trump saying countries who “do not retaliate”, “will be rewarded”.’
While 10 per cent tariffs planned for Australia are now being paused for 90 days, Treasury is worried Trump’s prohibitive tariffs on China will hit Australian government revenue.
A warning was issued this week in Treasury’s Pre-Election Economic and Fiscal Outlook.
‘These tariffs, and other retaliatory responses, will weigh on international trade, investment and growth, and disrupt supply chains,’ it said.
‘This will have direct and indirect effects on the Australian economy.
‘This escalation in trade hostilities has created significant economic uncertainty and exacerbates the risks to the economic and fiscal outlook.’
The futures market is now expecting the Reserve Bank to slash interest rates from 4.1 per cent now to 2.85 per cent – a level last seen in December 2022 (pictured is Sydney’s Pitt Street Mall)
Moomoo market strategist Jessica Amir said Trump’s pause on tariffs, outside of China, had buoyed Wall Street with the S&P500 soaring 9.52 per cent but warned investors to be cautious about the latest rallies
Even before the full extent of the Trump tariffs were known, Treasury was expecting the price of iron ore, the commodity used to make steel, to crash to $US60 a tonne by early 2026.
A year ago, iron ore was fetching $US120 a tonne and was worth $US107 a tonne as recently as February, when the share market peaked.
But it’s now worth less than $US100 a tonne and a plunging price means the Australian government gets less revenue from company taxes.
Weaker iron ore prices also means Budget deficits for years to come, including a $42.2billion deficit for 2025-26.
A return to surplus in these circumstances would only be possible if the Australian government slashed spending to deal with the fall in government revenue.
Treasury also warned the US-led trade war with China could weaken Australia’s economic activity if Australian exporting businesses were reluctant to invest and hire more people.
‘The indirect effects on Australian exports through our other major trading partners, particularly China, will be larger,’ it said.
‘Ongoing uncertainty in relation to trade hostilities and associated volatility in financial markets will weaken consumer and business confidence, which will have implications for consumption and business investment, including in Australia.’
Weaker business investment can also potentially push up unemployment.
The Australian dollar on Wednesday had fallen below 59 US cents for the first time since the start of the Covid pandemic in March 2020 but it has since recovered to 61 US cents.
