Donald Trump’s election victory could deprive Australian home borrowers of 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 import 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, who served on the board 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 to stop Australia from getting some of that boost,” he told Daily Mail Australia.
He added that he was raising the prospect of no rate cuts next year. Before Trump’s victory, Professor McKibbin was already predicting another rate hike in early 2025.
“There’s a chance they could be 25 basis points higher 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 the monthly payments on an average $600,000 mortgage.
Donald Trump’s election victory could deprive Australian borrowers of rate cuts, fears former Reserve Bank board member
Australia is already struggling with 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 its demand for Australian iron ore, the commodity used to make steel.
“When the United States imposes tariffs on China, China is the hardest hit, followed by Australia,” Professor McKibbin said.
This would occur when US tariffs would lead China to make fewer manufactured goods that would otherwise have gone to the United States, the world’s largest economy.
China’s reduced demand for Australian resources would in turn weaken the Australian dollar, leading to higher prices for imported goods, fueling higher inflation.
The US dollar would also strengthen – further weakening the Australian dollar – as less US currency would be exchanged for other denominations to purchase 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 exempted it from its double-digit tariffs.
“There are no direct tariffs on Australia, but we have energy and mining that goes directly to production networks in China, which then goes directly to the United States,” he said.
“That’s a significantly bad policy for Australia.”
In a paper for the Washington-based Peterson Institute for International Economics, he predicted a 5.4 percent rise in the U.S. dollar against all currencies as a result of tariffs on China.
Reserve Bank Governor Michele Bullock has already ruled out a rate cut in 2024 and this week also suggested another rate hike was still an option.
“The reason we’re not ruling out anything in or out is that we think there are still some upside risks,” he said.
Headline inflation in the year to September fell to a three-and-a-half-year low of 2.8 percent.
While within the Reserve Bank’s 2 to 3 per cent target, the RBA noted that this consumer price index figure was based on temporary $300 electricity rebates and falling petrol prices , which fluctuate.
Reserve Bank Governor Michele Bullock has already ruled out a rate cut in 2024 and this week also suggested another rate hike was still an option (file image)
Core inflation, excluding volatile items, was higher at 3.5 percent.
Services inflation was even higher, at 4.6 percent.
Goods inflation was low at 1.4 per cent, but Professor McKibbin feared Trump’s tariffs would cause prices of imported goods and components to soar, reviving the inflation nightmare after the Covid lockdowns.
Bullock said that while the RBA considered “geopolitical risks”, it had not done economic modeling on Trump’s proposed tariffs.
“An election in the United States is one thing; we don’t draw up specific scenarios for each one,” he told reporters Tuesday.
“Otherwise we could obviously spend all day doing scenarios.”
Australia’s big four banks (Commonwealth, ANZ, Westpac and NAB) plan to cut interest rates in February.
But the futures market now only expects two rate cuts in 2025, a big change from October, when four rate cuts were expected.
The 30-day interbank market now considers a rate cut in December to be a 12 percent probability.