RBA done with rate rises… for now: HSBC

Yasmine Raso

Senior Journalist, Financial Newswire

27 March 2023

Market experts have continued to speculate on whether the Reserve Bank of Australia (RBA) will continue or halt their rate rise roll in April, with HSBC now jumping on the bandwagon to support the latter.

Paul Bloxham, Chief Economist, Australia, NZ & Global Commodities at HSBC, said the RBA is likely to keep the cash rate at 3.60 per cent for several months because the Australian economy “passed a turning point in activity, the jobs market and inflation” earlier this year.

“There is considerable uncertainty about the what the RBA is likely to do next, reflecting data and reaction function uncertainty,” he said.

“In particular, it is very difficult for the RBA itself to calibrate exactly how much tightening will be needed to slow the economy just enough, to get inflation to fall to its 2-3% target fast enough for them to be comfortable, but without delivering a recession.

“We see the RBA prioritising a soft economic landing, even if this means above target inflation for a while. The recent global banking developments are likely to help the case for an RBA pause. However, with inflation expected to be high for some time yet, we do not expect cuts anytime soon.”

Bloxham said there have been several factors that have contributed to the position the RBA finds itself in, including the rapid and substantial rate of hikes with 350 basis points in 10 months, household savings at a high during and post-pandemic and the impending “fixed rate mortgage cliff”.

“It is not possible to have seen the full impact of the monetary tightening that has already been delivered. Typically, the lags in monetary policy transmission mean it takes 6-12 months to see the largest effect of cash rate changes on the economy,” he said.

“It is very difficult to know how much of [the pandemic savings] will be deployed in increased consumer spending and for how long.

“Through the pandemic a large share of the mortgage book shifted to 2- and 3-year fixed rate loans that offered very low interest rates as a result of the RBA’s term funding facility. Many of these mortgage terms expire this year and rates for these borrowers are set to rise sharply, from around 2% to around 5.5%.

“This rollover accounts for around 20% of the national mortgage book over the next year or so. By the RBA’s estimates, of the 350bp of cash rate tightening so far, only 240bp has come through to average mortgage rates partly as a result of the lagged impact of the fixed rate mortgage cliff.

“All this uncertainty is likely to mean that the RBA may be a bit more cautious than otherwise. However, we do not expect cuts anytime soon. To cut rates the RBA would need to be convinced that inflation was likely to rapidly return to its target band. That seems unlikely in the coming quarters.”