Australia's central bank, in its semi-annual Financial Stability Review, cautioned about the potential negative impacts of U.S. trade policies on the global economy. The bank highlighted that uncertainties surrounding these trade policies, along with potential retaliations, could lead to a surge in risk aversion in markets and heightened financing costs for businesses due to the repricing of risk. The report warned that disorderly price adjustments in international financial markets could occur, affecting both corporations and the non-banking lending sector.

The announcement by U.S. President Donald Trump regarding new tariffs raised concerns, resulting in threats of retaliation from various trading partners. The imposition of tariffs, particularly on China, could have significant repercussions. Australia, as a key exporter to the U.S., is subject to a 10% tariff, while its exports to China face potentially much higher levies.

There are growing concerns about a potential slowdown in China, which could further strain its financial system, particularly in the real estate sector. This situation might require Beijing to implement measures to support economic growth, potentially exacerbated by increased debt levels in certain sectors.

Despite external uncertainties, the RBA stated that domestically, banks were well-capitalized, businesses remained robust, and pressures on households had somewhat alleviated with easing inflation and falling interest rates. The RBA maintained its interest rate at 4.1% and is observing inflation trends closely, given the strong labor market. Market expectations suggest a high likelihood of a rate cut in May, with a total expected easing of 80 basis points this year due to the recent developments around U.S. tariffs.

The RBA also noted a decline in borrowers at risk of defaulting on their loan repayments, although it highlighted the risk of vulnerabilities escalating if relaxed financial conditions lead households to accumulate excessive debt, especially following the recent increase in home prices after the rate cut in February.