RBA Keeps Rates on Hold as It Points to Trade War Threat

By James Glynn

SYDNEY--The Reserve Bank of Australia kept interest rates unchanged at its policy meeting this week, avoiding political entanglements ahead of an election on May 3 while also saying it is seeking further confirmation that inflation will remain in retreat.

At the conclusion of a two-day policy meeting Tuesday, the RBA's newly formed monetary policy board also issued a warning about the darkening global growth outlook and the dangers associated with a deteriorating geopolitical environment.

The official cash rate was left at 4.10%, which was in line with market expectations.

In an indication that the RBA debated cutting interest rates, the board highlighted the potential for weaker global growth as confidence is sapped by the trade policies of the Trump White House.

"Recent announcements from the United States on tariffs are having an impact on confidence globally and this would likely be amplified if the scope of tariffs widens, or other countries take retaliatory measures," the board said.

"Geopolitical uncertainties are also pronounced. These developments are expected to have an adverse effect on global activity, particularly if households and firms delay expenditures pending greater clarity on the outlook," it added.

"Inflation, however, could move in either direction," the board said.

The comments highlight the growing risks the RBA faces in keeping policy settings restrictive for another month while uncertainty about global outlook rises

Wall Street giant Goldman Sachs this week raised the probability of a recession in the U.S. in the year ahead to 35% from 20%.

It also downgraded its growth forecast for the U.S. economy and predicted that the Federal Reserve would need to cut rates three more times before the end of the year.

Downgrades to world growth have also come from Paris-based Organization for Economic Co-operation and Development and leading rating agencies in recent weeks

Global markets are on edge ahead of U.S. reciprocal tariff announcements later this week that are set to affect a raft of U.S. trading partners. The shift toward protectionism in the U.S. has already knocked share markets sharply lower and promoted hostility in the global trading community.

Australia has already been stung by tariffs on steel and aluminum, but the trade war is likely to have wide consequences on confidence, especially with the U.S. administration indicating that it is prepared for economic pain as it reconstruct the economy.

All eyes are now on the release of first-quarter inflation data in Australia at the end of this month, which will frame the RBA's next policy meeting in late May.

Most economists expect the RBA to cut interest rates another two or three times this year.

The RBA lowered the official cash rate for the first time since 2020 in February, but Gov. Michele Bullock made it clear then that it was not the start of a rush of cuts.

The economic backdrop to the policy meeting was strong with inflation falling and economic growth is gathering fresh momentum. More notably, the job market remains strong with the unemployment rate hovering just above 4.0%. The economy is pulling clear of a weak patch in 2024, supported by income tax cuts and stronger consumer spending.

Australians will elect a new government in early May, with polls currently indicating that Labor will be returned for a second term, albeit pools suggest the outcome will be close.

Write to James Glynn at james.glynn@wsj.com