Westpac’s Bill Evans tips RBA rates pause as global uncertainty roil markets

Forecasters are pulling back from earlier predictions of ever-higher rates amid fears about global financial institutions and budget pain for many borrowers.

Interest rates could take a pause as economic activity slows. Photographer: Lisa Maree Williams/Bloomberg via Getty Images sydney construction

The Reserve Bank could pause interest rate rises next month before capping out its hikes at a lower than expected 3.85 per cent, according to a top forecaster.

The RBA has signalled a more tentative approach and is considering a break in April, according to Westpac chief economist Bill Evans, who has lowered his forecasts from expectations the central bank would get to 4.1 per cent in this cycle.

Global share markets have been rocked by international uncertainties amid widespread concerns about the banking crisis spilling over into other parts of the economy and this is also playing into a more cautious approach.

Mr Evans now expects the Reserve Bank to keep rates at 3.6 per cent when it meets in April following a run of weaker than expected data and adverse developments in global markets.

Mr Evans said the RBA would however opt for a final 25 basis point rate hike to 3.85 per cent when it meets in May.

“Prior to the Governor’s surprisingly hawkish response to the December quarter Inflation Report where he effectively signalled consecutive rate hikes in both March and April, Westpac had expected that there would be a pause in April with a final hike in May,” Mr Evans said.

“The Governor has had an ‘about-face’ following the March board meeting. He responded to the disappointing growth print for the December quarter; the slower than expected wages gain in the December quarter; and the 0.4 per cent fall in the monthly inflation index in January.

Mr Evans said that the major change since the RBA board meeting in March had been the adverse developments in global markets.

At the start of the month there was active discussion about whether the Federal Open Market Committee would hike by 50 basis points at its March meeting.

While markets expect the FOMC to hold steady Mr Evans said a shift to “no change” was ”a bridge too far” for the FOMC and he still expects it to raise the cash rate by 25 basis points at next week’s meeting.

“But we anticipate real uncertainty will continue to surround the prospects for policy thereafter,” Mr Evans said. He believes the US economy faces a tough road.

“The most realistic risk scenario for the US economy involves a credit squeeze from regional banks,” he said. This will affect those with assets below $250bn, and that are not subject to the strict Dodd – Frank regulations, and were exempted following active lobbying of the Trump government in 2018.

“As markets, regulators and rating agencies restrict the capacity of these smaller banks to support small to medium enterprises and small business a new drag will emerge for the US economy. This is also likely to undermine confidence and raise some questions about the stability of the global banking system,” Mr Evans said.

The squeeze from higher interest rates is already being felt locally. Four in five Australians say they have pulled back on spending on non-essentials and holidays after household bill stress spiked under cost-of-living pressures.

A report from financial comparison site Finder found the biggest pain points in the household budget between December and February were groceries, rent and mortgage costs, petrol and energy bills, which have each increased steadily since March 2021.

Finder Australia CEO Chris Ellis said the mix of rate rises on mortgage repayments, surging rents and high inflation had caused budgets to be stretched for many families and singles. “The cost of living has soared dramatically, making it increasingly difficult for many Australians to afford their basic needs,” he said.