Will the RBA cut the cash rate in May? How US tariffs are shaping Australia’s interest rate outlook

As the Reserve Bank of Australia (RBA) prepares for its next monetary policy meeting on May 20, 2025, the financial landscape is being significantly shaped by global trade disruptions and domestic economic pressures. Recent developments in US tariff policy have created unprecedented economic uncertainty that directly impacts Australia's economic outlook and monetary policy decisions.

Trump's Tariff Regime and Global Trade Disruption

The global economic environment has been dramatically altered by President Donald Trump's sweeping tariff announcements. On April 2, 2025, Trump announced a "minimum baseline tariff of 10%" on all imported goods to the United States. Additionally, Trump imposed a much steeper tariff specifically on Chinese goods, triggering significant retaliation. 

Economic Mechanism of Tariff Impacts

The tariffs function as a direct tax on imported goods, raising costs throughout supply chains. For example, an importer of $100 worth of Australian beef would owe a $10 tariff to the US government, raising the total cost to $110. This inevitably increases the input costs for products utilising that beef, such as hamburgers, potentially reducing demand for both the final product and the Australian export.

Australia’s biggest trade partners—China, Japan, South Korea, and Vietnam—are also targeted by U.S. tariffs. As these economies slow, so too will their demand for Australian exports like coal, iron ore, gas, and beef. This could reduce Australia’s national income and hit mining and agriculture sectors particularly hard.

Financial Market Volatility and Investment Risk

The S&P 500’s $5 trillion market cap loss post-tariff announcement highlights the scale of market reaction. Risk aversion is rising, and if capital begins fleeing risk-sensitive economies like Australia, the Aussie dollar could depreciate. This would make imports costlier and potentially raise the cost of borrowing for Australian banks and corporates.

Rising Prices for Imported Goods in Australia

Australia is not immune to global cost pass-throughs. Supply chain disruptions will likely increase the price of imported machinery, electronics, and other goods. This could stoke inflation and squeeze household budgets—right as many Australians are already under financial stress.

Business and Consumer Confidence Under Pressure

Businesses may delay investment and hiring. Consumers may reduce discretionary spending. Westpac-Melbourne Institute Consumer Sentiment Index has already dropped 6% since the start of April, reflecting heightened anxiety.

Keeping these developments in mind,  The Australia Institute has explicitly called on the RBA to reconvene its monetary policy board immediately rather than wait until May, arguing that the central bank should "get on the front foot" with a rate cut.

According to Greg Jericho, Chief Economist at The Australia Institute, “the risks of the economy slowing more than anticipated are now heightened due to the Trump tariffs.”

He added that, “Waiting until nearly the end of May is far too long. The RBA should be nimble enough to realise that the tariffs levied by the USA are an unprecedented move that is already sending shockwaves through the world’s economy.

“It should get out in front and cut rates now rather than wait for Australia’s economy to be damaged further.”

In its semi annual Financial Stability Review, the RBA warned that US trade policies may create notable challenges for the global economy. The central bank noted these developments could lead to heightened risk aversion across financial markets and push up financing costs for businesses. 

The report warned that "Vulnerabilities in key international financial markets could be crystallised and lead to disorderly price adjustments. It added that "A sharp repricing of risk, from the current low levels, could abruptly increase borrowing costs for corporations and exacerbate financial challenges.”

Can you expect a cash rate cut and by how much?

While an out-of-cycle rate cut remains unlikely, economists now widely expect the RBA to lower the cash rate at its next scheduled meeting on May 20.

In response to escalating global risks, ANZ economists have revised their interest rate outlook. Previously expecting just one rate cut in 2025, ANZ now forecasts three 25 basis point cuts—in May, July, and August—bringing the cash rate down to 3.35%. They also flagged a possible 50 basis point cut in May if financial markets deteriorate or global economic conditions worsen significantly.

NAB has also pulled forward its rate cut forecast, anticipating a substantial 50-basis-point reduction in May, which would lower the cash rate from 4.10% to 3.60%. This projection makes NAB the most dovish among the major banks, with additional cuts expected in July, August, November, and February.

So while a surprise cut before May 20 is unlikely, a rate cut at the May meeting is definitely on the table—especially if economic data continues to weaken in the weeks ahead.