Finally, some relief. After falling for three straight and brutal days in a row, the S&P/ASX 200 Index (ASX: XJO) is currently experiencing something of a relief rally. At the time of writing, the ASX 200 has rebounded by a healthy 1.51% and is back over 7,450 points. Could hopes for a super-sized interest rate cut be responsible?
The cause of the global market meltdown that investors all around the world have been enduring in recent weeks is no mystery. Thank US President Donald Trump's radical 'liberation day' tariff plans. Investors, businesses and governments from all corners of the globe have been royally spooked by Trump's wide-ranging 'reciprocal' tariff plans.
These tariffs will see new import taxes placed on almost every country in the world when they send goods into the American economy. Such tariffs range from 10% (in Australia's case) to 34% for China, and go as high as 50% for Lesotho. Most economists and commentators predict that these tariffs, if allowed to go into effect, have the potential to spark a deep global recession, one that might be accompanied by higher inflation.
Trump tariffs to spur RBA interest rate cuts
One of the few silver linings from this whole sorry saga is a prediction of interest rate relief from the Reserve Bank of Australia (RBA) though. The RBA was already expected to reduce the cash rate further in 2025 before the Trump tariffs were announced. After its February 25 basis point cut, most economists were expecting at least one more cut this year, perhaps more.
But now, as we covered this morning, some economists are predicting as many as five interest rate cuts this year.
A reduction in interest rates of this scale would deliver a lot of financial relief to mortgaged households. They could even help put a floor under any further falls in the share market, although that's far from certain.
One expert even thinks big relief from the RBA could come sooner rather than later.
According to reporting from Bloomberg, analysts at Deutsche Bank are expecting the RBA to deliver a super-sized interest rate cut of 50 basis points when the bank meets next month on 20 May. In a note, Deutsche Bank economist Phil Odonaghoe stated this:
Unless the US administration tilts to an 'off ramp' within days on its tariff policy, we expect the RBA to lower rates by 50 basis points in May.
We then expect another 50 basis points of cuts in the second half (25 basis points at each of the August and November meetings), taking the cash rate to 3.1 per cent by the end of 2025.
This would have a significant impact on the Australian financial landscape. But how these potential cuts might balance out with the impact of Trump's tariffs is the big unknown. Stay tuned.
