Wary markets betting RBA’s run of rate hikes is over

Financial markets say the RBA’s historic tightening cycle is over and are pricing in a rate cut by the end of the year, but lingering concerns of another banking blow-up are obscuring the picture.

RBA governor Philip Lowe says inflation remains too high in Australia, but recent US banking failures have changed the equation for central bankers across the developed world. Picture: Bloomberg

Financial markets say the Reserve Bank’s historic tightening cycle is over and are pricing in a rate cut by the end of the year, after the US Federal Reserve hiked by 0.25 percentage points but emphasised that a recent string of banking ­failures could drag on lending and growth in the world’s largest economy.

NAB head of market economics Tapas Strickland said investors remained on high alert for further dangers lurking in the global ­financial system, and were trying to factor in the low probability that a credit crunch could trigger rapid rate cuts in coming months.

This extreme uncertainty was muddying the message from markets about the possibility of further interest rate increases, Mr Strickland said.

“I think we are really in wait-and-see mode to see what’s out there,” he said.

“We need to give it a little bit more time to see whether there are more problems with any companies or banks.”

After announcing the interest rate increase to 4.75-5 per cent (the American central bank targets a range rather than a point) early on Thursday morning AEDT, the Fed chairman, Jerome Powell, flagged that a further hike was in store, although he repeatedly emphasised risks of ­further bank problems and a tightening in fin­ancial conditions.

“We’re looking at what’s happening among the banks and asking, is there going to be some tightening in credit conditions?” Mr Powell said during the press conference following the rates ­decision. “In a way, that substitutes for rate hikes.”

Jim Chalmers in a statement said Australia was not “immune from volatility in global financial markets” but “Australians should be reassured that our banks are well-regulated, well-capitalised and highly liquid and are in a better position than most to deal with these disruptions”.

The Treasurer said the government and regulators were “continuing to closely monitor market developments in the US and Europe, including the collapse of Silicon Valley Bank and the UBS takeover of Credit Suisse”.

RBA board minutes released this week showed policymakers considered pausing at the March meeting before ultimately deciding to hike by a quarter of a percentage point to 3.6 per cent.

Economists at Westpac and JP Morgan said the RBA would hold off hiking for an eleventh straight meeting in order to assess the ­potential fallout from the financial system worries, although persistently high inflation suggested the central bank would need to move again.

Mr Strickland said he still anticipated the RBA to hike in each of the next two meetings, bringing the cash rate to a peak of 4.1 per cent by May.

“There is a genuine risk of a pause at their next meeting, but we don’t think the RBA should, given where inflationary pressures are at the moment,” he said.