Interest rates: why US collapses may shift RBA to reverse

US bank failures are sparking upheaval in financial markets, but could spell good news for Aussie borrowers sooner than they think.

US banking collapses could bring earlier-than-expected interest rate cuts to Australian households, according to financial markets, as fearful investors push share prices back to their 2022 levels.

The second-biggest banking failure in US history, of tech company lender Silicon Valley Bank, has shaken financial markets dramatically despite US authorities stepping in quickly to reassure depositors.

Australian shares slumped 1.4 per cent on Tuesday, with the benchmark ASX 200 index dropping 99.9 points to 7008.9, wiping out all of the strong gains it made during January.

And financial markets have started pricing in Reserve Bank of Australia interest rate cuts – possibly as soon as July and definitely by December – said IG analyst Tony Sycamore.

“A potential banking crisis threat trumps high inflation any day of the week,” he said, with financial markets also pointing to a reduced chance of US rate rises.

“There has been a dramatic repricing of interest rate expectations.”

Bell Direct market analyst Grady Wulff says “people are freaking out”. Picture: Supplied

Mr Sycamore said the ASX 200 had dived 5 per cent in five days, and the US banking worries were acutely felt by Aussie investors because the financial sector accounted for almost 29 per cent of our market.

“Until the dust settles in the U.S, investors will continue to ask questions of all banks,” he said.

Bell Direct market analyst Grady Wulff said interest rates and share markets would also be impacted by US inflation and Australian employment data this week.

“At the moment markets are extremely volatile,” she said.

“People are freaking out for no reason – everyone is very reactive.”

Ms Wulff said her firm was still expecting a 0.25 percentage point RBA rate rise in April “but that could change given what’s going on in the US”.

Thursday’s release of February jobs data - following a rise in Australia’s unemployment rate from 3.5 to 3.7 per cent in January, will be an important factor in RBA rate decisions.

Mr Sycamore said the market would be looking for the unemployment rate to remain at 3.7 per cent.

“A softer-than-expected number would reinforce the case for an RBA pause and possibly a rate cut,” he said.

“In contrast, a hotter-than-expected jobs number will likely be looked through.”

National Australia Bank strategist Rodrigo Catril said the market was now seeing a 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 deposits, whiles at the same time they are likely to adopt a more cautious approach to lending,” Mr Catril said.

“The Fed has been aiming to tightening conditions to cool the economy, now the Fed’s job has become easier in this regard,with banks ­expected to do the heavy ­lifting.”

Economists at Goldman Sachs, PIMCO and NatWest Markets predict no more rate rises from the Fed.

With Matt Bell