The Reserve Bank of Australia is set to offer some relief to mortgage holders by leaving the cash rate unchanged at its April board meeting, Westpac economists say, pausing after ten consecutive increases.
The bank’s chief economist Bill Evans now expects the cash rate to peak at 3.85 per cent, following a final 25 basis point hike in May, lowering his previous forecast of 4.10 per cent.
RBA Governor Philip Lowe has dialled down his hawkish rhetoric from earlier in the year, following disappointing growth data for the December quarter and signs that inflationary pressures are starting to ease.
Meanwhile, the recent turbulence in global financial markets, stemming from the collapse of Silicon Valley Bank, is another factor arguing for the RBA to pause in April.
“The most realistic risk scenario for the US economy involves a credit squeeze from regional banks,” Evans said in a note.
“As markets, regulators and rating agencies restrict the capacity of these smaller banks to support SMEs and small business (around 50 per cent of total market coverage) a new drag will emerge for the US economy. This is also likely to undermine confidence and raise some questions about the stability of the global banking system.”
Westpac economists have also adjusted their expectations for Federal Reserve monetary policy. They are forecasting a 25 basis point increase in the fed funds rate later in March, but now see that as the final move in the Fed’s tightening cycle.
Even if markets were to settle down before the RBA meets in April, there is still likely to be enough uncertainty around for the Board to justify a policy pause, especially given indications that it was already open to taking that option, Evans added.
Australia’s March quarter inflation report is likely to show price pressures remain uncomfortably high, forcing the RBA into one last rate increase in May, but by the second half of 2023 the focus is likely to have shifted towards the timing of rate cuts.
“We maintain our call that the preconditions for the beginning of the easing cycle will be apparent in the March quarter of 2024,” Evans said.
Those preconditions include inflation dropping back below 4 per cent, the economy stagnating in the second half of 2023 and remaining weak in the early part of 2024, and unemployment heading up towards 5 per cent by the end of 2024.
To read Bill Evans’ full report, visit WestpacIQ.