The rapidly escalating dispute between the United States and Denmark over Greenland’s sovereignty could force the Reserve Bank to hold interest rates steady as global volatility increases.
Renewed talk in the US about control, trade power and influence over the self-governing nation has wreaked havoc on the stock and bond markets throughout January.
Controversial talk of tariffs against European countries seeking to maintain Greenland and Danish authority on the North American island has led many Australians to question the risks to the local economy.
Unless conditions ease quickly, the impact of US-Europe volatility could play into the RBA’s hands when it comes to the first interest rate decision of the year in less than two weeks.
While one of the central bank’s top two roles is to keep rising inflation in Australia in check, troubled global markets and question marks over growth create a fine balancing act for Governor Michele Bullock to follow at the February meeting.
Another question is what to make of the fall in the unemployment rate – the RBA’s other main job is to promote full unemployment – and what that means for an economy still facing inflation problems and low productivity.
From walking to holding
A year of steady progress in reducing inflation saw the Reserve Bank successfully implement three interest rate cuts in 2025, despite geopolitical turmoil in the Middle East and Europe.
Borrowers took advantage of cuts in February, May and August to pocket hundreds of savings last year, after battling persistently high interest rates since 2022.
This was a welcome relief for many, as higher demand saw the average price of a home in Australia rise 8.8% to a record high of $880,000 in December.
The rate cut in May was especially cautious, in light of Trump’s VAT tariffs that wreaked havoc on markets a few days earlier.
Australians have three interest rate cuts in 2025. Photo: Getty
However, a new rise in inflation dating back to October set off market expectations for the bank’s February 3 decision to move from a rate cut scenario to a hold scenario and then move on to a sharp rate hike.
Expectations for a 0.25% rate hike on the Australian Stock Exchange’s RBA interest rate tracker rose from 25% to 60% in a single day this week.
Coupled with both stronger labor market data and increasing political unrest, expectations for a rate hike present a bleak picture for mortgage holders hoping for more easing.
Reserve Bank Governor Michele Bullock will have plenty to consider when making monetary policy decision in February next year. Photo: John Appleyard
“The impact of a breakdown in relations and possible retaliation, such as the European Union stopping to implement the already agreed trade deal, increases growth risk and is not conducive to maintaining inflation credibility,” said Commonwealth Bank macro and interest rate strategist Michael Tang.
“It will create some risk aversion, which will increase pressure on the curve.”
Why Greenland?
It has now been more than five years since President Trump first expressed interest in an idea to “buy” Greenland from Denmark.
Kulusuk, Greenland. Photo: Getty
The island’s unique location between Europe and North America means it benefits from its proximity to Arctic shipping lanes, while its rich mineral deposits and vast space make it an attractive place for infrastructure.
About 55,000 people live in Greenland, the majority of whom have Danish citizenship.
The country has been predominantly self-governed since 1979 and has an unusual real estate market with no private land ownership.
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