As anxiety and uncertainty continue to grip global financial markets, some of Australia’s largest banks remain split on the future outlook for interest rates locally.
According to Westpac chief economist Bill Evans, the Reserve Bank (RBA) now has enough reason to pause in April given the recent adverse developments and signs of “soft” data.
“Despite the better than anticipated employment report, we expect the risks around financial market developments and the evidence of the soft data since the February board meeting will prompt the RBA to use its ‘pause option’ in April,” he said in a recent note.
“Even if the markets settle by the time of the RBA’s April board meeting, there will be sufficient uncertainty for a prudent board that was already clearly open to a pause to take that option.”
Westpac has lowered its terminal rate forecast from 4.1 per cent to 3.85 per cent, which is expected to be reached after one more rate hike of 25 basis points (bp) in May.
However, ANZ economists have maintained their belief that the RBA will hike by 25 bp in both April and May, citing the “robustness” of data released during the past week.
“For the RBA, we suspect the major consideration in assessing the balance of the domestic fundamentals (which in our view support the case for further tightening) versus developments offshore, will be the potential for spillover into the real economy,” they said.
“While it is early days, this does not seem to be material in the context of the broader Australian economy yet. It is worth recalling the RBA did tighten in 2007 and 2008, with domestic considerations overriding market volatility, albeit from a different starting point.”
The ANZ economists said that the robustness of the domestic data was recently reflected in the February labour force survey, which showed a strong gain in employment along with a fall in the unemployment rate to 3.5 per cent.
Mr Evans similarly assessed the employment report as being “relatively strong” but noted that the view that unemployment had bottomed out and was beginning to trend higher “now requires more information to be confirmed”.
RBA now ‘much less hawkish’
Earlier this month, RBA governor Philip Lowe confirmed that the central bank was closer to a pause and said that the board would be carefully assessing the monthly employment and business indicators, which have now been released, along with retail trade figures and the monthly consumer price index (CPI) indicator, which are due out in late March.
“If collectively, they suggest that the right thing is to pause, then we’ll do that. But if they suggest that we need to keep going, then we will do that,” he said.
“So, we’ve got a completely open mind about what happens at the next board meeting.”
But this was notably before recent global major events including the collapse of Silicon Valley Bank and the problems faced by Switzerland’s second largest bank Credit Suisse.
Overseas, the European Central Bank (ECB) persisted with a 50 bp rate hike on 16 March, and Westpac still expects that the US Federal Reserve will raise the cash rate by 25 bp on 22 March. But this continued hiking will not extend locally, according to Mr Evans.
“Positioning prior to the recent market turmoil is key here,” the Westpac chief economist said.
“Whereas the FOMC and ECB have both been ‘talking up’ the prospect of rate hikes, the RBA has adopted much less hawkish rhetoric following the March meeting, signalling that a pause on hikes was already on the table for its April meeting.”
Mr Evans said that the issues will become more clear-cut for the RBA by the time of its meeting in May. Among the refreshed data that the central bank will have at its disposal is the key quarterly inflation report, which is due to be released on 26 April.
In the face of “ongoing high inflation and prospects of not returning to the target band until mid-2025”, Westpac argued that a pause in May would not be credible, leading to the bank’s decision to forecast one final hike of 25 bp to 3.85 per cent.
“By the time of the June meeting, with the cash rate deeply in contractionary territory, the economy slowing at a more rapid pace, and evidence from the March quarter wage price index that the trajectory for wages growth remains moderate, it will be appropriate to delay any further tightening until the next quarterly inflation report, released ahead of the August board meeting,” Mr Evans predicted.
“We expect that by August, the case for pushing the cash rate even further into contractionary territory will be weak as the economic slowdown becomes more entrenched and as we start to see real progress in lowering inflation, especially if global credit issues continue to impact growth and markets.”
The Commonwealth Bank has indicated that it will firm up its predictions for the RBA’s next meeting as developments progress and it sees more of the data flow.
“The two key data points that have already printed (labour force and NAB business survey) do not themselves suggest the RBA will pause, but there is now added uncertainty given the developments this week,” said CBA associate economist Harry Ottley.
