Cassandra Baldini* says the Australian financial markets have been bracing for a pause in rate hikes, however recent instability has economists recalibrating their view.
The coin is being tossed ahead of the Reserve Bank of Australia’s (RBA) meeting next month, with suggestions that an eleventh consecutive rate rise is not completely off the table.
“The RBA certainly can’t lean into the banking issues offshore given US and European central banks have hiked this week,” Commonwealth Bank head of Australian economics and market research Gareth Aird told Financial Standard.
“The RBA was willing to pause prior to the banking issues based on domestic factors – largely because the transmission mechanism in Australia hits home borrowers in a way it doesn’t offshore.”
Earlier in the month, RBA governor Phillip Lowe flagged the release of important data would largely inform the board’s policy decision in April.
In an economic outlook provided by Aird, he said two out of four domestic data releases have so far been published.
“The NAB Business Survey was robust and the unemployment rate dipped to 3.5 per cent in February from 3.7 per cent in January,” he said.
The February retail trade and monthly CPI indicator are the final two pending.
“…both [to be] published next week, could make or break the case to hike or pause,” Aird concluded.
On the other hand, HSBC chief economist Australia and New Zealand Paul Bloxham is leaning more towards a halt in rises.
“We think the RBA is done with rate rises, at least for the moment, we see them pausing in April and keeping the cash rate at 3.60 per cent for a number of quarters after that,” he affirmed.
“Our view is primarily about our expectation that the economy passed a turning point in activity, the jobs market and inflation around the turn of the year.”
Bloxham said HSBC believes the RBA will prioritise a soft economic landing, even if this means above target inflation for a while.
“The recent global banking developments are likely to help the case for an RBA pause.
“However, with inflation expected to be high for some time yet, we do not expect cuts anytime soon,” he explained.
Bloxham noted that there is still uncertainty around what exactly will happen, explaining it is very difficult for the RBA itself to calibrate exactly how much tightening will be needed to slow the economy.
“Enough to get inflation to fall to its 2-3 per cent target but without delivering a recession,” he said.
Last week, the Bank of England opted to raise interest rates, hiking them a further 25 basis points to 4.25 per cent.
*Cassandra Baldini is a senior journalist at Financial Standard.
This article first appeared at financialstandard.com.au
