Michele Bullock, Governor of the Reserve Bank of Australia (RBA), asserts that the central bank stands ready to cut interest rates if necessary to safeguard the economy from a potential global trade war. After holding rates at 4.1%, Bullock emphasized that the decision was not influenced by politics, despite the ongoing election campaign.
Meanwhile, KPMG Chief Economist, Dr. Brendan Rynne, KPMG Chief Economist, comments on the RBA Board’s 1 April 2025 rate decision. Unsurprisingly, the new RBA board decided to hold rates, given the uncertainty over the potential consequences associated with an escalating trade war, along with other economic indicators and prevailing risk factors.
Trimmed-mean CPI remains at the upper end of the RBA’s target range, and a range of risk factors underscore this inflationary challenge. The latest national accounts show that productivity growth is non-existent, while last week’s Budget reaffirms an outlook of historically elevated public sector spending, which will not help dampen overall aggregate demand and prices. The labor market remains tight, and Net Overseas Migration numbers are likely to decline, adding complexity to the economic landscape.
Geopolitical risks and trade barriers further complicate the inflation outlook, presenting another layer of uncertainty regarding how these factors will influence prices in the future. Given these considerations, KPMG believes the decision to keep rates unchanged is justified.
There is a ‘new story’ in yesterday’s statement—the ‘old story’ being the combination of the tail end of the COVID inflation pulse, decoupled productivity and wage growth, and high government spending. The new story, which overlaps these challenges, is about the potential consequences associated with an escalating trade war. The RBA says that inflation under these trade tensions could go either way, but it seems the bias is upwards. Uncertainty around U.S. tariffs, with respect to “if”, “how much”, “how long”, and “on what,” means the RBA has to keep its powder dry.
The 2025 National Trade Estimate Report on Foreign Trade Barriers, issued yesterday by the U.S. Trade Representative, says little on Australia in terms of unfair trade practices on U.S. exporters with respect to market access and non-tariff barriers. But the issue for Australia as a medium-sized open trading economy was always likely to be the indirect consequences of escalating trade tensions. The RBA is clearly attuned to these risks, and hence it is now on a heightened “watch and act” brief. “Despite the uncertainty of the global geopolitical landscape and its implications for the domestic economy, prior to today’s meeting, the market was still expecting the RBA to cut the cash rate by a further 50 basis points over the remainder of this year—one 25 basis point cut around mid-year and one around the start of Q4. KPMG continues to maintain this interest rate outlook as its central case.”
KPMG’s economic modeling shows that under a “contained” trade-war scenario—one where reciprocal tariffs are minimized and the trade war does not extend beyond what has already been announced with Canada, Mexico, China, and iron, steel, and aluminum tariffs—inflation in Australia rebounds by around half a percent over the remainder of 2025. This compares to a broader reciprocal tariff/trade war scenario, which sees a short-term inflation spike of around 1.0%, but again, this is short-lived. The RBA would likely look through the smaller one, possibly the bigger one, but either way, the trajectory for interest rate cuts has been disrupted and may be pushed back if the reciprocal tariffs are large.
Retail sales and economic activity update
The Board’s decision came just three hours after the February retail figures were released. Retail sales edged up by 0.2% in February, slightly below market consensus, which had anticipated a repeat of January’s 0.3% rise. With inflation rising slightly more over the same two months (0.64%), this represents essentially flat retail sales, which will not add either way to the RBA’s deliberations on a rate cut.
On an annual basis, however, compared to February 2024, seasonally adjusted retail turnover increased by 3.6%. This means retail sales grew in real terms over the past 12 months, given inflation increased by only 2.4%.
James Stewart, KPMG National Leader, Consumer and Retail, commented: “The simple reality is the Australian retail market remains challenged. While cost of living pressures may not be increasing, neither is there a tailwind likely to push customer confidence to rebound to sustainable levels. As a result, consumers are cautious, and likely to remain so in the near term.”
February’s industry-level results reflect a rebalancing of household spending as a result of the post-summer holiday period and the return to work and school. Food-related spending has driven the rise in retail turnover since the turn of the new year. Spending in non-food industries was mixed. Household goods retailing fell by 0.3%, following a sharp 4.4% fall in January, as discretionary spending continues to soften after promotional-driven growth in late 2024. This was partly offset by spending growth in department stores (+1.5%). Clothing, footwear, and personal accessory retailing also rose by 0.4%, following a strong 2.3% increase in January.
Online sales continued their strong performance, rising 1.7% in seasonally adjusted terms. Through-the-year online sales are now up 12.2%. Retail turnover outcome was mixed across states and territories. Western Australia led the gains with a 0.8% rise, marking its seventh consecutive monthly rise, followed by New South Wales (+0.5%). In contrast, Tasmania, Queensland, and Victoria recorded a monthly fall.
Sources:
- Statement by the Monetary Policy Board: Monetary Policy Decision | Media Releases | RBA
- Retail spending steady through February | Australian Bureau of Statistics
- https://kpmg.com/au/en/home/media/press-releases/2025/04/trade-fears-stubborn-inflation-justifies-rba-hold.html
Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.
