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Why the latest US interest rate hike means Australia while the US is hit by the banking crisis

The latest US interest rate hike could be the last as recent bank collapses raise concerns about global financial market instability, but it could help the Australian dollar.

For Australia, this could prompt the Reserve Bank to halt a planned rate hike in April and reconsider a possible rate hike in May.

The US Federal Reserve on Wednesday night raised the key fed funds rate by 0.25 percentage point to 5 percent from 4.75 percent.

But in an accompanying statement, the US Fed’s Federal Open Market Committee predicted that banks would be less likely to lend to each other, without specifically mentioning the collapses of Silicon Valley, Signature and Silvergate banks.

“Recent developments are likely to result in tighter credit conditions for households and businesses and weigh on economic activity, hiring and inflation,” it said.

‘The extent of these effects is uncertain. The Committee remains very attentive to inflation risks.’

The US Federal Reserve (Chairman Jerome Powell, pictured) on Wednesday night raised the key fed funds rate by 0.25 percentage point to 4.75 percent to 5 percent, but noted that “Recent developments are likely to result in tighter credit conditions for households and businesses.”

During the 2008 global financial crisis, concerns about financial instability led to a credit crunch, which was only resolved when the US government bought unwanted corporate bonds at great cost to inject liquidity into financial markets.

Westpac senior economist Elliot Clarke said the US Fed is now more likely to focus on maintaining financial stability, despite inflation remaining high.

“March’s 25 basis point rise is likely to be the last of this cycle as uncertainty in the banking sector tightens financial conditions and weighs on growth,” he said.

Clarke noted that the US Fed’s language meant it was less obsessed with tackling inflation at all costs, with the latest statement saying that “some additional reaffirmation of policy might be appropriate” compared to the statement from February that “continued increases in the target range will be appropriate.”

US headline inflation grew 6 percent in the year to February, well above its 2 percent target but well below the June 2022 level of 9.1 percent, which was the highest since 1981.

The latest US rate hike follows the collapses of the Silicon Valley (SVB branch in Santa Monica, pictured), Signature and Silvergate banks.

The latest US rate hike follows the collapses of the Silicon Valley (SVB branch in Santa Monica, pictured), Signature and Silvergate banks.

By comparison, Australia’s equivalent consumer price index rose 7.8 percent in the year to December, the fastest pace since 1990 and well above the RBA’s target of 2 to 3 percent.

A monthly inflation measure for February will be released on Wednesday of next week, but the RBA believes Australia’s inflation has peaked.

The Australian cash rate of 3.6 percent is for 11 years, but well below the US level of 4.75 to 5 percent.

This explains why the Australian dollar is only worth 67 US cents despite high iron ore prices.

The local currency benefits when there is a narrower gap between US and Australian interest rates.

A pause in US rate hikes could help the Australian dollar, as a stronger currency is likely to make imports cheaper, which would help reduce inflation.

The Australian Stock Exchange's 30-day interbank futures market has the RBA holding rates before cutting them in July.

The Australian Stock Exchange’s 30-day interbank futures market has the RBA holding rates before cutting them in July.

But the Australian dollar may also falter if turmoil in global financial markets affects risk appetite and demand for commodities whose fortunes are tied to economic activity.

The Australian Stock Exchange’s 30-day interbank futures market has the RBA keeping rates on hold before cutting them in July.

Minutes from the Reserve Bank’s March 7 meeting, released this week, hinted at a pause in rate hikes in April, signaling unforeseen developments with international banking.

“They agreed that upcoming releases on employment, inflation, retail trade and business surveys will provide important additional information, as will developments in the global economy,” he said.

“Members agreed to reconsider the case for a pause at the next meeting, acknowledging that the pause would allow additional time to reassess the outlook for the economy.”

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