Bank fail ‘puts rate cuts on agenda’

Markets are pricing in the chance of a Reserve Bank rate cut in coming months as the recent failure of Silicon Valley Bank in the US sends shockwaves through the global financial system.

The failure of California’s Silicon Valley Bank has roiled global markets. Picture: AFP

Markets are pricing in the chance of a Reserve Bank rate cut in coming months as the recent failure of Silicon Valley Bank in the US sends shockwaves through the global financial system.

As investors flipped from expecting hikes to anticipating cuts at upcoming RBA board meetings, NAB senior currency strategist Rodrigo Catril said the turmoil in the American bond market had created a “false signal” on the likely future path for the official cash rate in Australia.

This was despite very real concerns an aggressive monetary policy tightening in the past year may send more American or foreign banks bust over coming weeks and months, he said.

Mr Catril said markets were “in a state of flux” and investors were right to see some lower chance of RBA rate hikes over coming months. “Effectively, what we are seeing now is the market is pricing in quite an ­aggressive path of rate cuts by the US Fed, with potentially one more hike between now and May, and then 100 basis points (one percentage point) in cuts before the end of the year,” he said.

The market turmoil comes as NAB’s business survey showed cost and price pressures among firms remained elevated in February, undermining the case of a pause in rate rises at the next RBA board meeting in April.

Also on Tuesday, a separate survey from Westpac showed consumer confidence remained in the doldrums in March, holding at recessionary levels for the second month in a row amid soaring mortgage repayments, rents and living costs.

Investors on Tuesday again dumped shares in ASX-listed ­regional banks such as Bank of Queensland, which dropped by a further 2.9 per cent on Tuesday to trade nearly 8 per cent down over the past three trading days.

The benchmark ASX 200 index fell another 1.4 per cent on Tuesday, bringing its losses since the SVB failure to 4.1 per cent.

Amid the heavy sharemarket falls, Jim Chalmers in a statement on Tuesday moved to reassure Australians that “we have a resilient, well-capitalised banking system that has strong liquidity coverage”.

After convening a meeting with the Reserve Bank, Treasury, Australian Prudential Regulation Authority and Australian Securities & Investments Commission on Monday afternoon, the Treasurer said “we will continue to work closely with our regulators, the tech sector, investors and the broader financial sector to understand the implications as the situation evolves, including the impact on Australian industry”.

“While Australia is not immune from ongoing uncertainty in the global economy, our economy and financial systems are well placed in the face of these challenges,” Dr Chalmers said.

In the US, where yields on 10-year Treasury bonds are below the Federal Reserve’s federal funds rate, there remained concerns the aggressive rate rises of the past year had triggered a so-called “Lehman Brothers moment” that preceded the GFC.

Sunday’s failure of Signature Bank – a key bank for the cryptocurrency industry – reinforced investor fears of the potential for further contagion, and that this would force central banks to reverse policy tightening.

GSFM Funds Management adviser Steve Miller said it appeared investors had overreacted to what were most likely isolated incidents. “It (the SVB failure) is not anywhere near the magnitude of a Lehman moment, in my view,” he said.