Donald Trump’s election victory could deprive Australian home borrowers of interest rate cuts, a former Reserve Bank board member fears.
The Republican president-elect triumphed in both the Electoral College and the popular vote with a plan to impose 60 percent tariffs on Chinese goods.
President Trump also promised to impose tariffs of 10 to 20 percent on imports from other countries, with exemptions yet to be decided.
Warwick McKibbin, a board member of the Reserve Bank of Australia from 2001 to 2011, said this was a recipe for higher inflation in the “global economy”.
“It’s hard for Australia to avoid getting some of that momentum,” he told Daily Mail Australia.
He added that this raises the prospect of no interest rate cuts next year. Before Trump’s victory, Professor McKibbin already predicted another interest rate increase in early 2025.
“There’s a chance they’ll be up 25 basis points between now and early next year,” he said.
This would take the RBA cash rate to a new 13-year high of 4.6 per cent and add $100 to monthly repayments on an average $600,000 mortgage.
Donald Trump’s election victory could deprive Australian home borrowers of interest rate cuts, fears a former Reserve Bank board member
Australia is already experiencing high services inflation, but a new wave of US-led protectionism could also lead to higher goods inflation.
Punitive tariffs on China would also hamper demand for Australian iron ore, the raw material used to make steel.
“If the US imposes tariffs on China, China will be the hardest hit, followed by Australia,” Professor McKibbin said.
This would happen because US tariffs would cause China to make fewer manufactured goods that would otherwise have gone to the US, the world’s largest economy.
Reduced demand for Australian commodities from China would in turn weaken the Australian dollar, leading to higher prices for imported goods, leading to higher inflation.
The US dollar would also strengthen – further weakening the Australian dollar – as less of the US currency was exchanged for other denominations to buy imported goods.
Professor McKibbin, who is now director of the Center for Applied Macroeconomic Analysis at the Australian National University, said Australia would suffer economically even if the second Trump administration were to exempt Australia from its double-digit tariffs.
“There are no direct tariffs on Australia, but energy and mining go directly into the production networks in China, which then go directly to the US,” he said.
“That’s a significantly bad policy for Australia.”
In an article for the Washington-based Peterson Institute for International Economics, he predicted a 5.4 percent increase in the U.S. dollar against all currencies due to tariffs on China.
Reserve Bank Governor Michele Bullock has already ruled out a rate cut in 2024 and also suggested this week that another rate hike is still a viable option.
“The reason why we’re not ruling anything in or out is because we think there are still some positive risks,” she said.
Headline inflation in the year to September fell to a three-and-a-half year low of 2.8 percent.
While this was within the Reserve Bank’s target of 2 to 3 per cent, the RBA noted that this consumer price index was based on temporary electricity rebates of $300 and falling petrol prices which fluctuate.
Reserve Bank Governor Michele Bullock has already ruled out a rate cut in 2024 and also suggested this week that another rate hike was still a viable option (stock image)
Underlying inflation, which excludes volatile items, was higher at 3.5 percent.
Inflation in the services sector was still higher, at 4.6 percent.
Goods inflation was low at 1.4 percent, but Professor McKibbin feared Trump’s tariffs would push up prices for imported goods and components, reigniting the inflation nightmare that followed Covid lockdowns.
Ms Bullock said that while the RBA was taking “geopolitical risks” into account, it had not done any economic modeling based on Trump’s proposed rates.
“An American election is one thing – we don’t make specific scenarios for each one,” she told reporters on Tuesday.
‘Otherwise we could of course spend all day creating scenarios.’
The big four Australian banks – Commonwealth, ANZ, Westpac and NAB – are predicting a rate cut in February.
But the futures market now expects just two rate cuts in 2025, a big change from October, when four rate cuts were expected.
The 30-day interbank market now sees a rate cut in December as a 12 percent chance.