1. Trade war (escalation)
In this scenario laid out in the Reserve Bank’s quarterly statement on monetary policy, the US imposes sweeping new tariffs. That prompts retaliation and a slowdown in global trade. Supply chains are hit and business confidence falls.
Australia would feel the consequences quickly: weaker export demand, rising import prices, and a difficult mix of slower growth and temporary inflation. Here, the Reserve Bank would likely look past short-term price increases and focus on deteriorating demand. A rate cut would become more likely, despite inflation being above target in the short run.
2. Trade peace (de-escalation)
If the US backs away from new tariffs and tensions ease, global confidence improves and trade stabilises. Australia benefits from stronger global demand, a rebound in commodity exports and rising investment.
In this setting, inflation rises gradually due to higher activity – not import price shocks. The Reserve Bank might hold rates steady, or even consider hiking rates if inflation pressures build. But this scenario also carries risk: if the recovery is faster than expected, interest rates may be left low for too long.
3. Baseline scenario
In the bank’s central case, trade tensions persist but do not escalate. Global growth slows moderately and firms adjust to ongoing strain in supply chains.
Australia sees subdued but stable economic growth. Inflation remains within the 2-3 percent target band in the near term, and the Reserve Bank would stay open to either raising or lowering interest rates, depending on how risks evolve.