The spectre of a second Donald Trump presidency and its potential to wreak havoc on the Australian economy will dominate a Reserve Bank board meeting that may force the institution to drop its warning of any further increases in official interest rates.
There will be a mystery guest at this week’s meeting of the Reserve Bank of Australia.
Credit:Marija Ercegovac
The bank board is expected to use its post-meeting statement to highlight “global uncertainties and risks”. Those uncertainties relate to the Middle East, China and the war in Ukraine, but the US election and a possible dramatic change in economic policy loom as the swing factors.
Interest rates on government borrowings have been climbing for several weeks in anticipation of a Trump victory, as investors expect inflation to be higher if the former president is re-elected this week.
This has pushed up the American dollar while certain investor classes, particularly cryptocurrencies, have also experienced renewed interest in line with Trump’s chances of victory. Even the chances of a cut in Australian interest rates, which financial markets are not expecting until April, have been affected by the increased prospect of a Trump presidency.
Trump’s policies include his stated aim to impose tariffs of up to 60 per cent on all imports, the mass incarceration and deportation of up to 8.3 million undocumented workers and the former president’s public support for, in effect,
overruling the Federal Reserve on US interest rate settings.
Analysis compiled by renowned Australian economist and former RBA board member Warwick McKibbin and Peterson Institute economists Megan Hogan and Marcus Noland released in September revealed that Trump’s policy agenda would have a
substantial impact on the global economy.
Just a 10 percentage point increase in tariffs would leave the American economy 0.4 per cent smaller than it would be otherwise in 2026. There would be larger hits to Mexico and Canada. Australia’s economy would also shrink.
But Trump, who has argued that tariffs on imported goods would be paid by the exporting country, has warned of hikes in tariffs on Chinese goods of 60 percentage points. China’s economy would take the largest hit. It would be a full percentage point smaller in 2026 and Australia would be the second-worst affected. GDP here would be 0.2 percentage points lower than it would be without Trump’s intervention.
The Committee for a Responsible Federal Budget, an independent US organisation, estimates that rival candidate Kamala Harris’ agenda would increase American government debt by $US3.9 trillion ($6 trillion) over the next decade. The Trump agenda would increase debt by $US7.8 trillion by 2035, taking it to an unprecedented 143 per cent of GDP.
Westpac chief economist Luci Ellis expected that, while the RBA would keep a close watching brief on the US election, it would not change its immediate views on interest rate settings.
“Given the uncertainties surrounding the US election and its aftermath, we think it likely that the RBA will stand pat this time and see how global events play out,” she said.
RBA governor Michele Bullock has used her series of press conferences this year to say the bank is not “ruling anything in or out” in terms of future interest rate movements. After its meeting in September, she revealed the board had not discussed a possible rate rise.
Commonwealth Bank head of Australian economics Gareth Aird said that after erring on the side of caution, the Reserve Bank would have to shift its communication about future movements in interest rates.
“We are approaching the point at which the board should feel confident that the next move in rates will be down and not up,” he said.
“Put another way, the RBA’s communication should start to reflect the balance of risks to the monetary policy outlook.”
The bank will also release its latest outlook on the economy, including major changes from forecasts it issued in August.
The RBA had been expecting household consumption to strengthen, but it slackened towards the end of the financial year. Employment growth has been much better than forecast by the bank, although unemployment is around its expectations.
Inflation is coming down slightly faster than the bank had been predicting. The latest consumer price index showed prices increased by 0.2 per cent in the September quarter. Annual inflation was down to 2.8 per cent. Underlying inflation fell to 3.5 per cent.
The bank had been expecting headline inflation to be at 3 per cent by year’s end and for underlying inflation to be at 3.5 per cent by December.
https://www.watoday.com.au/politics/federal/prospect-of-trump-presidency-to-weigh-on-interest-rate-settings-20241103-p5knf8.html
(20min delay)