Economists are at odds over whether the Reserve Bank of Australia (RBA) should suspend rate hikes in April, with some raising concerns about the heightened risk of a recession, and others pointing to the possibility of a further surge in inflation.
In a market update this week, assessing the US bank failures and their flow-on to investment markets, AMP’s Shane Oliver said that it’s “normal for problems like this after rapid rate hikes”.
Last week, the US suffered its second-largest banking collapse in history when its 16th largest bank, Silicon Valley Bank (SVB), crumbled under the pressure of a deposit exodus and higher interest rates.
Speaking to InvestorDaily at the time, Dr Oliver said the collapse of SVB could strengthen expectations of a pause to the RBA’s monetary policy tightening cycle.
“Tightening cycles tend to come to an end whenever you run into a financial crisis, and I guess it just depends on how severe this one is,” he observed.
In an update just days later, Dr Oliver reiterated that amid heightened recession rhetoric, “it makes sense for central banks to pause rate hikes”.
“This includes the RBA,” he said.
Last week, the RBA increased the official cash rate for the 10th consecutive time to 3.6 per cent.
Despite earlier predictions that the bank would raise rates up to 4.1 per cent, the current state of affairs in the US and the Federal Reserve’s unknown response strategy have left the RBA with much to consider.
Namely, in its latest market update, NAB’s economists said much will depend on whether things settle quickly.
Although the RBA governor’s “comprehensive update” following the bank’s last meeting has been overshadowed by recent developments regarding the US bank failures, NAB economists believe it may regain attention if the current issues are promptly resolved.
“The RBA will have three weeks to consider how the SVB situation develops,” the big four bank said.
According to NAB, the current situation presents the bank with an opportunity to pause in April before reassessing the landscape in May, after the release of the next quarterly CPI data.
“If markets don’t continue to develop negatively, it would seem more likely that the RBA board will again seriously consider the data as it signalled last week,” the economists said.
BetaShares’ chief economist similarly believes that the RBA has the advantage of waiting to observe how the US Federal Reserve responds later this month.
“If the Fed considers the financial risks sufficiently great that it fails to lift interest rates this month, it’s very likely the RBA won’t either come April,” David Bassanese told InvestorDaily.
“But if the Fed judges the risk of financial contagion as ultimately so low that it can raise rates again this month, the RBA would likely not let US financial concerns get in the way of another rate rise — if local economic conditions still warranted such a move.”
Mr Bassanese suggested that the recent robust actions taken by US regulators have helped contain the risk of financial contagion.
Consequently, he said, the near-term direction of local interest rates remains contingent on domestic economic data, including employment figures, consumer spending, and inflation rates.
As such, Mr Bassanese predicted that the Fed would likely follow through with a minimum 0.25 per cent rate hike this month.
“My base case is that the data will on balance remains sufficiently firm for the RBA to raise rates again in April, though at the same time, signal a likely pause for at least a few months thereafter,” he said.
Inflation likely to intensify
Professor Peter Swan from UNSW told InvestorDaily that the RBA needs to take further action in response to domestic events.
Reflecting on the significant surge in energy costs disclosed on Wednesday, following the net-zero policies adopted by the Commonwealth government, NSW, and Victoria, Mr Swan said inflation would likely intensify even further.
“If RBA pauses it will be due to political pressure and will require even more tightening in the future. Hence I expect they will do the right thing and continue,” Mr Swan said.
“The fall in the 10-year rate to below the cash rate suggests the markets are afraid of a new global banking crisis. Hence they will add their pressure to that of the Albanese government to slow down.”
