The turmoil in global financial markets, which started with the collapse of Silicon Valley Bank, will have major implications for the outlook for the global economy.
Regional banks in the US will be subject to more regulation. They’re also faced with nervous depositors who might be thinking about moving their money to other banks, while ratings agencies will be closely scrutinising them for potential downgrades.
These banks are incredibly important: They represent 60 per cent of residential property loans, 45 per cent of consumer loans and about 50 per cent of commercial loans.
As they come under pressure and tighten credit, so the Federal Reserve will have a lot of its policy tightening work done for it. As a result, we've lowered our forecast for the federal funds rate by 50 basis points.
We also expect to see the Reserve Bank of Australia hold the cash rate steady at its April board meeting, before one last increase in May to a terminal rate of 3.85 per cent.
Financial market turmoil and growing evidence of a slowing economy will provide the RBA with an ideal opportunity to pause, and indeed the minutes from the March board meeting indicate they will be considering that.
We still expect growth in the Australian economy to be quite soft this year at around 1 per cent, only lifting to around 1.5 per cent in 2024.
Next year will lay the foundations for interest rate cuts with inflation coming down and growth being weak. We expect to see those cuts begin in the March quarter and extend all the way into the middle of 2025 with a total of around 150 basis points.
To hear more of Bill's thoughts on recent market developments, visit WestpacIQ.