Financial markets are no longer expecting the Reserve Bank of Australia to keep raising interest rates to deal with the worst inflation in 32 years following the collapse of American banks.
Just two weeks ago, the Australian Securities Exchange futures market expected the RBA to raise interest rates three more times from an existing 10-year high of 3.6 per cent to an 11-year high of 4.35 per cent.
That old prediction had the cash rate reaching the highest level since December 2011.
But on Tuesday afternoon, the ASX’s 30-day interbank cash rate futures had the Reserve Bank leaving rates on hold.
The dramatic move occurred after the Silicon Valley Bank and the Signature Bank both collapsed, triggering fears there would be a repeat of the 2008 Global Financial Crisis.
The futures market reaction in Australia has occurred after American financial markets briefly forecast the US Federal Reserve slashing rates by 80 basis points by the end of 2023, from a 15-year high level of 4.5 to 4.75 per cent.
CommSec senior economist Ryan Felsman said financial markets were worried, even though American government action to protect the deposits of the failed banks had warded off a crisis.
‘We have seen a repricing of central bank rate expectations around the world following the collapse of Silicon Valley Bank and Signature Bank over the course of the last few days,’ he told Daily Mail Australia.
‘There’s distress in the U.S. banking sector that’s mainly in the regional sector, it’s not in the commercial banks, the large ones. It’s unrelatable to the Australian banking sector.’
The Bank Bill Swap Rate market – used to price bonds rate – has the RBA pausing in April, with Westpac’s monthly consumer confidence reading for March producing the worst reading since the 1991 recession.
KPMG chief economist Brendan Rynne said the Reserve Bank was now likely to leave interest rates on hold after raising the cash rate one more time to 3.85 per cent.
‘If you look at the ASX cash rate futures, it’s moved dramatically over the last two weeks,’ he told Daily Mail Australia.
‘Two weeks ago, they were already baking in three interest rate rises and you were having a terminal value in the cash rate of around four and-a-quarter per cent.’
The Reserve Bank normally increases rates in 25 basis point increments, which would have implied a 4.35 per cent cash rate.
Dr Rynne said the RBA would be likely to embark on rate cuts from 2024, taking the cash rate back to a neutral rate of 2.5 per cent, as inflation fell from an existing 32-year high of 7.8 per cent.
‘Ultimately, you’ve got to bring the cash rate down to the neutral rate of two-and-a-half per cent as the economy normalises,’ he said.
Westpac is expecting seven rate cuts in 2024 and 2025 that would take the cash rate back to 2.35 per cent by September 2025, where it was until early October 2022.
Australian rate rises since May 2022 have caused monthly repayments on an average, $600,000 mortgage surge by 46.4 per cent to $3,377, up $1,071 from $2,306 as a Commonwealth Bank variable rate climbed to 5.42 per cent from 2.29 per cent.
The United States had a 6 per cent headline inflation rate in the year to February, down from 6.4 per cent in January, American Bureau of Labour Statistics data showed.
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