US banking crisis could force RBA rate pause
Even with inflation well above central bank targets in Western economies, financial markets are fast giving up on their long-held expectations of further rate hikes.
A massive downshift in the market pricing of policy interest rates by the Federal Reserve has flowed on to the Australian market after the collapse of three regional US banks.
Even with inflation still well above central bank targets in Western economies, financial markets are fast giving up on their long-held expectations of further rate hikes and pivoting to expected cuts.
It is potentially good news for homeowners that were facing a further lift in mortgage repayments, but they could still face soaring cost of living pressures if central banks are unable to bring inflation under control because of pressure on US regional banks.
As of Tuesday morning, Reserve Bank meeting-dated overnight index swaps showed less than 50 per cent odds for a 25bp increase to the RBA cash rate through the rest of this year.
For the RBA’s next meeting in April, the market implied a 3 basis point cut in rates, whereas a week ago the market was almost fully priced for a 25 basis point hike.
The market-implied terminal rate fell to 3.686 per cent for August, versus the current effective cash rate of 3.57 per cent. That implied a roughly 46 per cent chance of a hike by then.
By September, market pricing implied a slightly lower cash rate of 3.52 per cent.
That compared to market pricing early this month of a peak rate near 4.4 per cent.
It comes amid the biggest downward repricing of US interest rate bets since the Covid-19 pandemic.
“The market is now seeing a big tightening in US financial conditions, the collapse of Silicon Valley Bank effectively means US banks will now need to lift their lending rates in order to attract deposit whiles at the same time they are likely to adopt a more cautious approach to lending,” said National Australia Bank strategist Rodrigo Catril.
“The Fed has been aiming to tightening conditions to cool the economy, now the Fed’s jobs has become easier in this regard, with banks expected to do the heavy lifting.”
As of Monday, there were just 13 basis points of Fed tightening priced in for next week’s meeting. That compared to 33 basis points last Friday and 43 basis points after Fed chair Jerome Powell’s hawkish testimony before Congress last week.
The market-implied Fed funds rate peak dived to 4.74 per cent versus 5.68 per cent last week.
Almost 100 basis points of cuts, to a 3.79 per cent Fed funds rate, is priced in for year end.
Economists at Goldman Sachs, PIMCO and NatWest Markets predict no more hikes from the Fed.
Chair Powell indicated last week that the Fed could re-accelerate the pace of its rate hikes from 25 to 50 basis points at its meeting, depending on the outcome of economic data before its meeting.
US CPI data for February are due for release early Thursday, Australian time.
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