How Trump’s about-face on tariffs means fewer RBA rate cuts ahead

Do you want the good news or the bad news? That old chestnut. What do you usually go for first, the good or the bad? Well, we already know the good news. The USA and China have backed down from the precipice of a damaging bilateral trade war that threatened to plunge both countries – and given they’re the two biggest economies in the world – the rest of us, into a protracted economic slowdown.

Quite rightly, share markets around the world have rejoiced as a result, piling on the gains. Well, more specifically in the case of most stock markets, further recouping the losses triggered by the whole trade war fiasco in the first place. Thanks President Trump!

What you might not know is that with the good news that stocks are closing in on their pre-correction highs (see chart below of the S&P/ASX 200 Index), interest rate markets are also on the rise – and this could be very bad news for mortgage holders.

Unfortunately, this is the common yin and yang of financial markets. When things are looking dicey for the global economy, and stock markets are probably falling out of bed, the great balancer is that market interest rates are probably on the way down too. This is because investors will start to bid up the price of bonds – generally considered a safe-haven asset compared to stocks – plus increase their bets central banks will be forced to cut interest rates to drag economies out of recession.

The first item, buying bonds, tends to push bond prices higher, and due to the inverse relationship between bond prices and bond yields, it means bond yields fall. When enough of them move lower, market yields fall, and this makes it easier for your bank to get cheap funding and provide you with lower mortgage rates. So too does the central bank cutting official interest rates, that would be the Reserve Bank of Australia (RBA) in our case.

The opposite is also true, however. When things aren’t expected to be so bad, investors will sell those safe-haven bonds, driving up market yields, and central banks are less likely to need to cut rates to save their economies. That’s exactly what happened this week. Let’s investigate how share investors’ gains are likely to flow through to increased mortgage holders’ pain.

The implied yield curve

The “implied yield curve” sounds fancy and complicated, but it’s actually a very simple and very helpful tool for mortgage holders to check where the RBA’s official cash rate is likely to be over the next 18-months. Its official name is the “ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve”, and it’s updated daily by the ASX (You can access it here).

The vertical blue bars represent where the short term interest rate market is pricing the RBA’s official cash rate is going to be at the end of each month between now and October 2026, i.e., 18 months into the future. The light blue horizontal dashed line represents the current RBA cash rate of 4.10%. As you can see, the vertical bars show the market is pricing in RBA rate cuts, with May’s bar showing 4.0%, June’s bar showing 3.835%, and so on.

We can do a little math to work out monthly rate cut probabilities. For this month (remember there’s an RBA meeting 19-20 May), the market believes there’s a 40% chance of a 0.25% cut to the official cash rate (4.10% - 4.00% = 0.10%; 0.10% / 0.25 % = 40%). The first month that has a 100% or greater probability of a 0.25% cut is June (4.10% - 3.835% = 0.265%; 0.265% / 0.25% = 106%).

Now, the RBA doesn’t have a meeting scheduled for June, the next is in July – so we can interpret this as the market is warm on a rate cut this month, but should that not be the case, then a cut by July is a lock. In fact, given July’s implied yield is 3.765%, the market is pricing a 34% chance of two 0.25% cuts across the next two meetings.

The likelihood of that second 0.25% cut grows to 92% by the August RBA meeting, and becomes a lock by the September meeting. In all, the market is pricing as much as 0.925% worth of cuts over the next 18 months – so nearly four 0.25% cuts in total.

How Trump’s about-face on tariffs just jacked up your mortgage repayments

Unfortunately, the ASX only provides a snapshot of the implied yield curve each day, so you can’t really see how it has changed over time. Fortunately, I maintain my own database of implied yield curve data, and therefore, I can do just that! See below how the implied yield curve has changed over the last few months.

This article first appeared on Market Index on Wednesday 14 May, 2025.