Australia stands to lose if US tariffs on China trigger trade war, central bank says

SYDNEY, March 5 (Reuters) - Australia stands to lose if U.S. tariffs on China trigger a global trade war, a top central bank official warned on Wednesday, adding it was one factor that led to a reduction in domestic interest rates last month.

In a speech in Sydney, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser said a world of volatility, uncertainty, complexity and ambiguity was making a comeback, with measures of global trade uncertainty at 50-year highs.

"Australia is heavily integrated into, and reliant on, the global economy more broadly – and particularly China," Hauser said at the Australian Financial Review Business Summit.

"Hence the bigger macroeconomic risk for us would be if the imposition of U.S. tariffs on third countries triggered a global trade war that impaired our trade and financial linkages more broadly."

On Tuesday, U.S. tariffs of 25% on Mexico and Canada took effect , along with a doubling of duties on Chinese goods to 20%, as Washington launched new trade conflicts with its top three trading partners.

Beijing swiftly retaliated with levies on a range of U.S. goods including agricultural and food products, as well as slapping export and investment restrictions on 25 U.S. firms.

Hauser said the possibility of a global trade war played a part in the RBA's decision to lower rates for the first time in over four years. The cut also reduced the risks of inflation undershooting the midpoint of its 2-3% target band, he added.

"Monetary policy works with lags – so it must be set with an eye to the future, not the past," he said.

He cautioned it was too soon to declare victory on inflation, which is projected to stay above 2.5% for the next couple of years given a surprisingly strong labour market.

The sustainable level of unemployment could be lower, he added, but the RBA still assessed the labour market to be tight. For this reason, the RBA board was cautious about further cutting rates and would need to see more progress on inflation first.