'Trade war': RBA tipped to slash rates in 2025, house prices to rise, petrol prices, inflation to fall

Interest rate traders are betting on the Reserve Bank cutting rates three times in 2025 to shelter Australia's economy from a sprawling trade war in a move likely to boost house prices, as assets like shares tied to economic activity struggle. 

A 25 basis point rate cut when the RBA meets on May 20 is now a near certainty by cash rate futures traders, with March quarter inflation data - due April 30 - the last obstacle to derail expectations. 

"For Australia, the net effect of Trump's announcement is that it poses much more downside risk to economic growth than upside risk to inflation - hence it adds to the case for an RBA rate cut as early as next month," says David Bassanese, chief economist at Betashares.

"I think lower rates will see a rebound in house prices, the declines we saw were driven by affordability, as rates come down it will allow prices to go up because people can borrow more and we're supply constrained."

The Betashares economist now expects Australia's trimmed mean inflation - stripping out the impact of volatile food and energy prices - to cool to 2.7% in the March quarter and, as a result, has pencilled in three rate cuts this year. 

Petrol prices tipped to tumble

Elsewhere in markets, benchmark US WTI oil futures tumbled 6.2% to US$66.63 a barrel in another shift likely to torpedo inflation, with NRMA's weekly fuel report now calling for unleaded bowser prices to fall from an average of $2.03 in Sydney on Monday to the mid-$1.60s over the next three to four weeks.

On Friday, the ASX's energy sector slumped 6.1% as oil and gas major Woodside (ASX: WDS) tumbled 6.5% to $21.03 and LNG bellwether Santos (ASX: STO) lost 6.5% to $6.14. Shares in Shell-branded fuel distributor Viva Energy (ASX: VEA) have been marked down 9% in two trading sessions.

Falling petrol prices may drag headline inflation below the RBA's forecasts through 2025 and is a factor likely encouraging interest rate futures traders to bet on three rate cuts this year.  

The central bank's current forecasts from its February Statement on Monetary Policy call for core inflation to drop to 2.7% by the June quarter and sit at that level through to the middle of 2027, with cash interest rates forecast to fall 50 basis points to 3.6% by December 2025.

Headline inflation - including volatile energy prices - is forecast by the RBA to rebound to 3.7% by December 2025 largely due to confusion about the ongoing application of government subsidies for household energy bills.

Australian house prices to climb

In March house prices marked two consecutive monthly gains to a national record high since the RBA cut borrowing rates 25 basis points to 4.1% in February to give borrowers their first rate relief since it last cut in November 2020.

Consultancy KPMG told investors before President Trump's shock trade war pushed rates traders to revise their expectations for 2025 this week the following:

"For houses this year there will once again be some regional variation with Perth house prices rising by 4% but Darwin seeing only 1.2% growth. Canberra and Melbourne will be solid performers on 3.5% growth each, with Sydney a more restrained 3.3%, Brisbane 3.1%, while Adelaide and Hobart are expected to be lower on 2% and 1.8% respectively."

"In 2026, where house price growth will be higher, Sydney will reclaim top spot on 7.8%, with Melbourne and Brisbane next in line on 6.0% and 5.6% respectively."

Shares tipped to fall

On the other side of the ledger, risk-on assets linked to economic growth like shares aren't expected to be protected from interest rate cuts given the hit to business investment, consumer confidence, trade, and corporate profits from Trump's tariffs. 

"Given the even bigger threat to global growth it looks like share markets will have a further leg down," AMP's chief economist Shane Oliver told investors on Thursday. 

"Our assessment remains that shares will have a 15% plus correction measured from this year’s high. A 10% fall in US shares was not enough to put pressure on Trump but a 15% plus fall likely will at some point resulting in some moderation in the tariffs and refocus on the market positive aspects of his agenda (like tax cuts and de-regulation). 

"And eventually the Fed will likely respond with rate cuts, although this may be delayed given US tariffs will also add to US inflation."

On Friday morning AEDT the S&P/ASX 200 (ASX: XJO) extended losses to fall 1.5% to 7,756 to mean it's given back 5.4% to start 2025. In the US the tech-heavy Nasdaq 100 Index cratered 5.97% overnight and futures pointed to more losses when US markets open on Friday.