‘The bottom line is it’s definitely negative for growth, [but] the impact on inflation is less certain,” said RBA Governor Michele Bullock.
The Reserve Bank of Australia (RBA) has said it is unsure how the current tariff war between the United States and other countries will affect inflation in Australia as everything is shrouded in uncertainty.
Speaking at a recent parliamentary inquiry hearing, RBA Assistant Governor Sarah Hunter said that while the trade war is expected to slow global growth, its effect on Australian inflation is unclear due to multiple economic forces at play.
China’s Response Could Offset Damage
The Reserve Bank expects that the Chinese Communist Party (CCP) will counteract U.S. tariffs by pumping money to support its economy.
“We expect that [monetary stimulus] to offset the drag from tariffs. That will mean a different composition of growth in China relative to what would otherwise happen,” she told the Standing Committee on Economics.
“So they’ll have a weaker net export position. They won’t be able to export as much.”
As the Australian economy is strongly connected with China’s, it is expected that the country will be affected by the tariff war.
However, Hunter said the CCP’s fiscal and monetary stimulus would limit the knock-on negative impacts for Australia.
Currency Fluctuations Could Help—Or Hurt
In addition, the assistant governor stated that Australia’s floating exchange rate could also play a role in reducing the impacts.
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“We obviously have a floating exchange rate that acts as a substantial buffer on some of those negative demand shocks that can come through from overseas,” she said.
However, the assistant governor pointed out that the floating exchange rate could have a double-edged effect on domestic inflation.
“If there’s a downturn in the global economy, activity starts to weaken. Generally, the exchange rate will depreciate, and that supports our net exports,” he said.
“It provides a bit of a boost to our exporters, [and] makes things a bit more expensive to bring in. So we perhaps import a bit less, and we choose to consume locally.
“Because of these financial market impacts, the sort of that coming through in terms of a positive impulse for inflation.”
Nevertheless, Hunter added that weaker domestic activities and the impact of trade dispersion resulting from a depreciated currency could cause inflation to slow down.
“We’re not really sure what the net impact on inflation would be. It’s very, very hard to tell,” she said.
A general view of steel rods at a manufacturing plant in Adelaide, Australia, on Aug. 12, 2013. Morne de Klerk/Getty Images
Economic Growth Expected to Take a Hit
Hunter’s comment was echoed by RBA Governor Michele Bullock.
“The bottom line is it’s definitely negative for growth, [but] the impact on inflation is less certain, and it does depend,” she said.
It is worth noting that the RBA’s baseline forecast only features the China scenario and does not include the tariffs the United States imposes on other countries.
It also does not include other policies being announced by the U.S. government that will have an impact on its domestic economy.
Australia Won’t Be Affected Like Canada
At the same time, Hunter said Australia would not be affected by the tariff war as much as Canada.
The assistant governor cited an analysis by the Bank of Canada–Canada’s central bank–which stimulated what would happen if there was an escalation of the situation between the US and Canada, with tariffs applied on both sides.
“They simulated an estimate of some very substantial negative impacts on their economy– something akin to what they went through in COVID,” she said.
“We don’t think Australia is anywhere near that exposed. We wouldn’t expect that to play out here.
“We’re not as large a trading relationship with the US as Canada, for example. So there is a negative impact in terms of GDP, but it’s in a relative sense, small here, which is obviously somewhat reassuring.”
The United States is Australia’s third-largest trading partner, with two-way trade ($98.7 billion) less than one-third of that of China ($325 billion) in 2023.
Meanwhile, the United States is Canada’s largest trading partner, accounting for 75.9 percent of the country’s total export in 2024.
