Knowledge & insights

Welcome to Bendigo Bank’s monthly market update for May, with the latest news on financial markets, the global backdrop and our national economy.

Today, we’ll have a look at:
the latest views on the net impact of US tariffs,
the evolving path for jobs and inflation here,
and how this is likely to influence the RBA in setting official interest rates through 2025.

Volatility on financial markets remains extreme, even after some of the latest exemptions and deferrals of the so-called ‘reciprocal tariffs’ that the US government imposed on April 3rd, with equity markets clawing back some their losses but difficult times ahead.

As we have noted here and on our business insights website since the start of the year, tariffs are generally bad for everyone but especially problematic for the country imposing them, so with the escalation between the US and China (the world’s two largest economies) it’s a case of just how much slower will these two economies be growing this year and next. The latest International Monetary Fund forecasts were unsurprisingly pessimistic given the 125 to 145% tariffs, even though they may end up being closer to only 60%, with the IMF now seeing US growth reduced by a third to 1.8% this year, and China’s GDP growth projected at 4% (down from 4.6)- which may well be a best-case scenario given how challenging any negotiations will likely be.

The IMF also downgraded Australia’s expected growth rate from 2.1 to 1.6%, and similarly we have reduced our forecast growth rate from 2.4 to 2 % in 2025, given the lower global growth profile ahead.

Fortunately (unlike the US who face stagflation due to their tariffs) our inflation outlook appears much more benign than previously forecast, with the Trimmed Mean (the Reserve Bank’s preferred measure of underlying inflation)
expected to settle between 2 ½ and 2 ¾ percent and to stay there… and the uncertain global backdrop with lower growth ahead limiting upside risks to inflation.

As a result, the primary focus for the RBA, who have been dealing with a global inflation shock for 3 years, is quickly moving from price stability and inflation to protecting growth and jobs.

The good news is the RBA can ease rates more quickly if global conditions suddenly worsen- and the next cut is almost certain for May 20^th, with the only question its magnitude.

The markets are now factoring in 5 rate cuts to around a 2.8% level by year end a deeper path than previously expected, while we have four more cuts including May in our forecasts down to around 3.1%, 25 basis points per quarter. A larger 50 basis point cut in May is most unlikely unless markets become dislocated like in the GFC, which isn’t currently visible, but a 35-basis point cut from the RBA in May would round out the cash rate to more convenient fractions.

And lastly, consumer and business confidence have been impacted by global factors and uncertainty ahead of the federal election, but Australia’s lower exposure to tariffs than our peers and lower interest rates ahead should see a rebound in consumer sentiment later in the year, with outperformance in our region. Challenging, uncertain global conditions will likely persist, but our major trading partners may weather the storm better than elsewhere.

And that’s the market update from Bendigo Bank.