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 per cent import tariffs on Chinese goods.
President Trump also vowed to impose 10 to 20 per cent tariffs on imports from other countries, with exemptions yet to be decided.
Warwick McKibbin, who was a Reserve Bank of Australia board member from 2001 to 2011, said this was a recipe for higher inflation in the ‘world economy’.
‘It’s hard for Australia to be prevented from receiving some of that impulse,’ he told Daily Mail Australia.
He added it raised the prospect of no rate cuts next year. Before the Trump victory, Professor McKibbin was already predicting another rate rise by early 2025.
‘There’s a chance they’ll 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 monthly repayments on an average $600,000 mortgage.
Australia is already struggling with high services inflation but a new wave of American-led protectionism could also lead to higher goods inflation.
Punitive tariffs on China would also hinder its demand for Australian iron ore, the commodity used to make steel.
‘When the U.S. puts tariffs on China, China is the worst affected followed by Australia,’ Professor McKibbin said.
This would occur as American tariffs led to China making fewer manufactured goods that would have otherwise gone to the U.S., the world’s biggest economy.
Reduced demand for Australian resources from China would in turn weaken the Australian dollar, leading to higher prices for imported goods – feeding into higher inflation.
The US dollar would also strengthen – further weakening the Australian dollar – as less of the American currency was needed to buy imported goods.
Professor McKibbin, who is now the director of the Australian National University’s Centre for Applied Macroeconomic Analysis, said Australia would suffer economically, even if the second Trump administration exempted Australia from its double-digit tariffs.
‘There are no tariffs going on Australia directly but we have energy and mining going straight into the production networks in China which then goes straight across to the U.S.,’ he said.
‘That is a significantly bad policy for Australia.’
He predicted a 5.4 per cent increase in the US dollar against all currencies, as a result of the tariffs on China, in a paper for the Peterson Institute for International Economics.
Reserve Bank Governor Michele Bullock has already ruled out a rate cut in 2024 and this week also suggested another rate hike was still a live option.
‘The reason why we’re not ruling anything in or out is we do think there are still some risks on the upside,’ she said.
Headline inflation in the year to September fell to a three-and-a-half year low of 2.8 per cent.
While it was within the Reserve Bank’s 2 to 3 per cent target, the RBA noted this consumer price index figure was based on temporary $300 electricity rebates and falling petrol prices which fluctuate.
Underlying inflation stripping out volatile items was higher at 3.5 per cent.
Services inflation was higher still at 4.6 per cent.
Goods inflation was low at 1.4 per cent but Professor McKibbin feared Trump’s tariffs would see prices for imported goods and components soar, reviving the inflationary nightmare after the Covid lockdowns.
Ms Bullock said that while the RBA considered ‘geo-political risks’, it hadn’t done economic modelling on Trump’s proposed tariffs.
‘A U.S. election is one thing – we don’t do specific scenarios for every one of those,’ she told reporters on Tuesday.
‘Otherwise we could obviously spend all our day doing scenarios.’
Australia’s Big Four banks – Commonwealth, ANZ, Westpac and NAB – are forecasting a February interest rate cut.
But the futures market is now only expecting two rate cuts in 2025, a big change from October when four rate cuts were expected.
The 30-day interbank market now regards a rate cut in December as a 12 per cent chance.
