In February, Governor Philip Lowe convinced the market there were multiple interest rate rises ahead. The market quickly priced in an expected peak in the cash rate of 4.2% (between three and four more rate rises at the time).
That was three weeks ago, and the mood has since changed.
The cash rate rise in March was accompanied by a less firm statement of intention going forward by the RBA – a small nod to the weak economic data which had been coming through in the meantime.
Nothing grabs the attention of the finance sector like a possible run on the banks, and the collapse of Silicon Valley Bank and Signature Bank in the US late last week has catalysed interest. Australian Treasurer Jim Chalmers noted that he is monitoring the situation closely for any local implications from these collapses.
The dramatic events bring to light the risks that arise from increasing interest rates rapidly. In the US, it opens the possibility of further weakness in the banking sector. This is due to unrealised losses from holding long-term securities that have declined in price as interest rates have risen. Despite intervention at both ends of the crisis – to shore up depositor confidence and to provide liquidity to banks under pressure – the Federal Reserve will likely have to recalibrate it’s tightening of monetary policy.
In Australia too, financial markets have reacted by greatly reducing their expectation for a cash rate rise in April from close to 50% at the start of March to 0% today. (Zero chance may be overdoing it – if we were to see a strong labour market report tomorrow, the RBA would likely still be considering a rate rise).
This blog was co-authored by Lester Anthony Gunnion, a Manager in the Deloitte Access Economics team.