RBA meeting minutes showed that US trade policy was a significant consideration in the board’s May monetary policy meeting, almost leading to a 50 basis point rate cut.

RBA assistant governor Sarah Hunter acknowledged that US tariff developments had been a key discussion point in the Reserve Bank’s May meeting.

“The broad-based nature of the proposed US tariffs, retaliation from major partners and other policy shifts all have the potential to structurally alter the world economy,” she said.

“What happens overseas matters for the Australian economy and is therefore a key factor in monetary policy settings.”

Since February, US President Donald Trump has used emergency powers to impose steep and wide-reaching tariffs on various trade partners, many of which he subsequently paused or amended.

The RBA flagged the erratic, unpredictable US trade policy as a material risk to global economic growth, with implications for Australia’s inflation and unemployment rates.

In their May meeting, the RBA board concluded that a modest 25 basis point rate cut would balance economic risks effectively and allow for flexibility to make further rate cuts as tariff impacts came into sharper focus.

While the trade war could pose downside risks for the Australian economy, there was also a risk that global supply chain disruption could spark another bout of inflation, the RBA noted.

The board also acknowledged that there was a risk that domestic consumer spending could remain weaker than expected throughout 2025, which would necessitate further interest rate cuts.

“The unpredictability and unprecedented nature of the current [tariff] situation makes it hard to be precise on the size of the impact,” Hunter said.

The Reserve Bank isn’t the only entity grappling with economic uncertainty. Hunter warned that unstable, erratic trade policy could slow down global economic growth as businesses adopt a “wait and see” approach to new investments.

She explained that in a high-uncertainty environment, firms would often delay making large investments, sparking declines in investment, output and employment.

“Typically, higher uncertainty leads firms to delay decisions that are costly to reverse, like investment and hiring. This makes sense intuitively, because there is value in waiting to see how things are playing out before making a decision that is (at least partially) non-reversable.”

OECD economic forecasts released on Tuesday reflected weaker global growth due to the tariff developments, as well as inflationary pressures for countries that imposed tariffs.

Further trade fragmentation, including fresh tariff hikes and retaliatory actions, could worsen the global economic slowdown and disrupt international supply chains, the OECD warned.

“The global economy has shifted from a period of resilient growth and declining inflation to a more uncertain path,” OECD secretary-general Mathias Cormann said.

“Our latest economic outlook shows that today’s policy uncertainty is weakening trade and investment, diminishing consumer and business confidence and curbing growth prospects.”