Business insights

The latest official rate rise to 3.6 % and subsequent comments from the RBA leave us set for a pause in rate hikes, ahead of further key data. Our latest views on the markets and the global backdrop.

The tenth successive RBA rate hike delivered last week leaves official rates 3 and a half percent higher than a year ago, but a range of factors suggest a pause is imminent. As we mentioned last month we expect a plateau in rates by May, but for the RBA to still maintain a tightening bias, and in the last few weeks; wages growth data released 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 % suggesting 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, the jobs market (including job vacancies) also peaked in late ‘22, and we expect households to steadily decrease discretionary spending, with a greater share of the family budget needed for interest repayments and the ongoing impact of inflation making all goods and services more expensive.

The monthly CPI indicator is a relatively new metric for the RBA to consider
and the quarterly inflation data (out on April 26th) will be more important than the next monthly CPI out on March 29th, but it was pleasing to see the monthly data for January a full one percent lower, and for core measures to also fall; even though housing and rental costs, food and holiday travel all remain highly inflated.

Spending has rotated from goods to services, but through 2023 inflation is hoped to steadily ease back to closer to 4 percent, not low enough for rate cuts, but gradually improving.

The other factor that may influence the RBA (and other central banks around the world) is stress in the US banking system with Silicon Valley Bank suddenly in the headlines and US regulators taking action to stabilise their banking system so, while this is a localised event and is most unlikely to present global contagion risks, it makes further rate hikes in the US much less likely.

As the chart shows, the US Federal Reserve is now expected to only take rates to around 5 %, only a week or two ago a 6 % rate was being discussed, but further US data on inflation, jobs and manufacturing will still be closely scrutinised and volatility in a range of markets will 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 lastly, 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.

And that’s the market update from eFunds ExpressBank.