The Reserve Bank of Australia (RBA) has raised concerns that ongoing U.S. trade policies could pose risks to the global economy, potentially increasing market volatility and raising borrowing costs for businesses.
In its semi-annual Financial Stability Review released on Thursday, the RBA highlighted the potential consequences of U.S. trade policies, particularly the possibility of retaliatory measures from other countries. These developments could lead to heightened risk aversion in global markets, which may, in turn, affect business and household spending.
The report cautioned that uncertainties surrounding U.S. trade policies could trigger financial instability, leading to disorderly price adjustments in key international markets. The RBA noted that a sharp increase in risk could lead to higher borrowing costs for corporations and exacerbate financial challenges, particularly for sectors relying on non-bank lending.
The report was finalized prior to U.S. President Donald Trump’s announcement of a new 10% baseline tariff on all imports to the U.S., as well as much higher tariffs on some major trading partners. Australia will be subject to the minimum 10% tariff, while its largest export market, China, could face tariffs as high as 54%.
The RBA further noted that a slowdown in China could worsen vulnerabilities within its financial system, particularly in the real estate sector, which has yet to show signs of a solid recovery. This could prompt additional policy responses from Beijing to support economic growth, though such actions may also increase debt-related challenges in certain sectors.
Despite these concerns, the RBA reported that domestic banks are well-capitalized, businesses are showing resilience, and financial pressures on households have eased slightly as inflation slows and interest rates decrease.
On Tuesday, the RBA maintained its interest rate at 4.1% following a cut in February, the first reduction in over four years. The central bank is now awaiting additional economic data to assess whether inflation is moving in the desired direction.
Market swaps indicate a 70% likelihood of another rate cut in May, with an anticipated total easing of 80 basis points for the year, influenced by recent developments related to U.S. tariffs.
The RBA also estimated that approximately 3% of borrowers are at risk of falling behind on loan repayments, a decrease from the peak of 5% observed in previous quarters. However, the RBA cautioned that easing financial conditions could lead to excessive household debt if households take on more borrowing. Home prices rose to record levels in March following the February rate cut.
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