Economists split on RBA's next move

Some say recent global financial turmoil will spur a pause in rate rises – but others aren't so sure

Economists split on RBA's next move

A number of economists are predicting that the Reserve Bank of Australia will pause its program of interest rate hikes next month in response to turmoil in the global financial markets.

The impact of the collapse of three regional US banks has led some economists to believe the RBA will hit the pause button on rate rises, although others are reserving judgement, according to a report by the Australian Associated Press.

The case for a pause

Westpac chief economist Bill Evans predicted in a note Friday that the RBA would hold off raising rates at its April 4 meeting before raising them one final time at its May 2 meeting.

“Positioning prior to the recent market turmoil is key here,” Evans wrote, pointing out that the RBA had already been one of the more dovish central banks globally prior to the US bank failures.

“Even if the markets settle a little by the time of the RBA’s April board meeting, there will be sufficient uncertainty for a prudent board that was already clearly open to a pause to take that option,” Evans wrote.

St George Bank economists wrote in a Friday analysis that “an RBA rate hike next month seems all but off the table.”

The St George economists said that it was too soon to tell whether the banking issues were systemic. The initial concerns appeared specifically related to individual issues with Silicon Valley, Signature and Silvergate banks in the US and Credit Suisse in Switzerland, the Australian Associated Press reported.

“But confidence is the bedrock of the modern financial system … if depositors think there’s a problem: there is a problem,” the economists wrote.

The St George economists also said the central bank would take into account the 10 consecutive rate hikes it has already delivered, taking the cash rate from 0.1% in April 2022 to its current 3.6%.

Differing views

Other market watchers continue to forecast an April hike. A team of ANZ economists wrote on Friday that they were still predicting 25-basis-point rate hikes in both April and May, the Australian Associated Press reported.

The overseas banking turmoil “does not yet seem to be material in the context of the broader Australian economy yet,” the ANZ team wrote. “It is worth recalling the RBA did tighten in 2007 and 2008, with domestic considerations overriding market volatility, albeit from a different starting point.”

The ANZ economists pointed out that the strong jobs report for February and solid business conditions reported in a recent NAB survey suggested that the Australian economy was still resilient.

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Commonwealth Bank is also still predicting a 25-basis-point hike in April, “as inflation remains high,” CommSec chief economist Craig James wrote in a note on Thursday.

Betashares chief economist David Bassanese agreed with ANZ that the strong jobs report was a strike against the idea of an April rate pause.

“Domestically, two other key reports before the next policy meeting are retail trade on March 28 and the monthly consumer price index report (CPI) for February on March 29,” Bassanese wrote Thursday. “If both reports remain on the strong side, it could be a case of ‘three strikes and you’re out’ for rate pause hopes.”

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