RBA Cautions US Tariffs May Impact Global Economy and Risk Markets

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Australia's central bank warned on Thursday that U.S. trade policies could create significant challenges for the global economy, increasing market risk aversion and raising borrowing costs for businesses.

The warning came after global stock markets declined following U.S. President Donald Trump's announcement of new tariffs, with retaliatory threats from several trading partners. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) expressed concern that ongoing uncertainty around U.S. trade policies, and the potential reprisals, could negatively impact consumer and business spending.

The RBA stated, "Vulnerabilities in key international financial markets could materialize and lead to disorderly price adjustments," warning that a sharp increase in risk premiums could raise corporate borrowing costs and worsen financial difficulties. It also highlighted that the non-bank lending sector might be particularly vulnerable.

The review was finalized before Trump's announcement of a 10% baseline tariff on all U.S. imports and even higher tariffs on some major trading partners. Australia would face the minimum 10% levy, but tariffs on its largest export market, China, could rise as high as 54%.

A slowdown in China could further expose weaknesses in its financial system, especially in the real estate sector, which has yet to recover fully. This may prompt additional policy measures from Beijing to support growth, but could also increase debt-related challenges in certain sectors.

Domestically, the RBA noted that banks were well-capitalized, businesses were resilient, and household financial pressures had eased slightly as inflation slowed and interest rates fell. The RBA kept interest rates unchanged at 4.1% on Tuesday, following a rate cut in February, and is awaiting further data to ensure inflation is moving in the right direction. However, it remains cautious that a strong labor market could trigger inflationary pressures.

Market expectations now suggest a 70% chance of an interest rate cut in May, with the total expected easing for the year rising to 80 basis points due to concerns over U.S. tariffs.

The RBA also estimated that around 3% of borrowers are at risk of falling behind on loan repayments, down from 5% at the peak. However, it warned that vulnerabilities could increase if easier financial conditions lead households to take on excessive debt. Home prices hit record highs in March after the February rate cut.

The RBA pledged to closely monitor any emerging housing-related vulnerabilities as financial conditions evolve.

Paraphrasing text from "Reuters" all rights reserved by the original author