Bendigo and Adelaide Bank: March Economic Update
A pause in interest rate hikes could be on the cards as soon as April, although relief in the form of rate cuts is still some way off, according to Bendigo and Adelaide Bank Chief Economist, David Robertson.
In his second economic update for 2023, Mr Robertson notes that a range of factors suggest a pause is likely in April or at the latest by May.
“The tenth successive RBA rate hike delivered last week leaves official rates 3.5% higher than a year ago, but a range of factors suggest a pause is imminent,” Mr Robertson says.
“As we mentioned last month, we expect a plateau in rates by May, but for the RBA to still maintain a tightening bias. Rate cuts are unlikely to be seen until core inflation is back below 3%, which may not occur until late 2024.”
“In the last few weeks, the release of wages growth data was more benign than forecast, the unemployment rate has increased further to 3.7%, GDP data showed a deceleration in growth and in household spending, and the monthly Consumer Price Index fell from 8.4% to 7.4%.
“This suggests that the cumulative impact of the aggressive tightening cycle is starting to show. These events all seem to line up with our expectation that inflation peaked in December,” Mr Robertson said.
Mr Robertson noted the other factor that may influence the RBA is stress in the US banking system with the collapse of Silicon Valley Bank and US regulators taking swift action to stabilise their banking system.
“The US Federal Reserve is now expected to take rates to a ceiling of only around 5%. Just a week or two ago, a 6% rate was still being discussed, but further US data on inflation, jobs and manufacturing will continue to be closely scrutinised and volatility in a range of markets is likely to be elevated.
“For the RBA, it gives another reason to pause rate hikes for the moment, despite needing to keep warning of potentially higher rates until inflation is back near its target, and despite this event being on the other side of the globe,” Mr Robertson said.
Inflation and unemployment
“Inflation and the jobs market (including job vacancies) peaked in late 2022. The unemployment rate since then has increased to 3.7%,” Mr Robertson says.
“A greater share of the family budget is needed for interest repayments as well as the ongoing impact of inflation making all goods and services more expensive,” Mr Robertson says.
“Tourism and international arrival numbers continue to pick up and demand for Australian exports remains strong, which will be crucial to offset the slowing in household spending as higher interest rates weigh on demand,” Mr Robertson concluded.