The Reserve Bank has warned Donald Trump‘s tariffs are creating a lot of economic uncertainty in Australia – with the potential to spark a recession.

Its latest statement on monetary policy mentioned the word ‘uncertainty’ 12 times, in light of the US-led global trade war sparking a rollercoaster on financial markets.

‘With heightened global uncertainty, and the current unpredictability of trade policy, there are many plausible paths for how the economy might evolve,’ it said.

RBA Governor Michele Bullock said the meltdown on financial markets in early April, as Trump announced broad-based tariffs on every American trading partner, caught her by surprise.

‘Us, just like everyone else, was completely blown out of the water by the scale and the scope,’ she told reporters in Sydney on Tuesday.

Australia copped 10 per cent tariffs last month but China, Australia’s biggest trading partner, was hit with even more punitive 145 per cent tariffs.

A slowdown in China could hit demand for Australia’s biggest export, iron ore used to make steel, and potentially spark a recession in Australia.

‘If you look at our scenario analysis, it does suggest that in a really bad outcome, there could possibly be a recession, yes, but that’s in the very extreme circumstance,’ Ms Bullock said.

The Reserve Bank has warned Donald Trump ‘s tariffs are creating a lot of economic uncertainty in Australia – with the potential to spark a recession

‘At the moment, we’re not looking at that, we need to be alert.’

While the US and China have since tried to de-escalate their trade war, the Reserve Bank is worried this will affect business confidence.

‘Global trade policy uncertainty has risen substantially following the announcement of significant increases in tariffs by the United States in early April,’ it said.

But rather than fuel inflation, Ms Bullock suggested higher US tariffs were more likely to reduce inflation in Australia, as China sold its goods otherwise destined for American consumers into other markets. 

‘We have made the judgement that global trade developments will overall be disinflationary for Australia however there is a risk to inflation on the other side,’ she said.

Westpac chief economist Luci Ellis, a former RBA assistant governor, said the Reserve Bank was worried about the Trump tariffs weighing down Australia’s economic growth rather than reviving inflation.

‘Offshore risks were key in the RBA’s change of view,’ she said.

‘The current “roller-coaster” trade war is seen as weighing on both global and domestic growth.’

Its latest statement on monetary policy mentioned the word ‘uncertainty’ 12 times, in light of the US-led global trade war sparking a rollercoaster on financial markets (pictured are pedestrians in Sydney)

The Reserve Bank cut interest rates by 25 basis on Tuesday, taking the cash rate down to 3.85 per cent for the first time since June 2023.

But Ms Bullock revealed a bigger 50 basis point rate cut was considered.

‘There was a bit of a discussion about hold and that was, sort of, put aside pretty quickly. The discussion then was about a cut and how big (it would be) and there was a discussion about 50 and 25,’ she said.

There has not been a 50 basis point rate cut since May 2012, following the end of the mining boom. The RBA eased rates by smaller amounts during Covid in 2020.

The RBA’s latest rate cut will see standard variable home loan rates among the Big Four banks fall under six per cent.

A recession hasn’t occurred in Australia since the 2020 Covid lockdowns, which occurred 29 years after the last recession caused by higher interest rates.