Investors call time on Australian rate hikes in wake of SVB

INVESTORS are winding down bets for central bank tightening following the sudden collapse of US-based Silicon Valley Bank (SVB), with wagers getting stronger that Australia will deliver a pause next month. Australian government bonds rallied on Monday (Mar 13) in the wake of the biggest US bank failure in more than a decade. Three-year yields are now on track for their biggest decline since October when the Reserve Bank of Australia (RBA) move to slow the pace of rate hikes. Ten-year yields have crashed below the RBA’s cash rate in response to the SVB crisis. Money markets are also reflecting the rapid shift in sentiment. The overnight-indexed swaps contract covering the RBA’s Apr 4 meeting dropped to 3.67 per cent, just 10 basis points above the effective cash rate, to signal better than even odds of a pause. The peak rate is now seen around 3.85 per cent after they bet on a 4.1 per cent level a week ago. There’s no real concern that Australia will be directly affected by the SVB fallout. Rather, markets are considering the potential that the wobbles hitting parts of the US banking sector will help convince global policymakers to ease off from the most aggressive tightening in a generation. The RBA has acted as a bellwether for global central banks over the past six months, ever since it slowed the pace of hikes in October — a move that the US Federal Reserve followed. Governor Philip Lowe helped spur February’s bond rout with a surprisingly hawkish statement last month. He flipped back to a softer tone last week citing a desire to engineer a soft landing in the A$2.2 trillion (S$1.96 trillion) economy, a shift that also looks more in tune with the souring of global sentiment. “Now that the genie is out of the bottle, my sense is this won’t be cleared up quickly — meaning the Fed may need to pass on raising rates again at the next meeting,” said David Bassanese, chief economist at Betashares. “Depending on the fallout in the next few days, moreover, the mayhem will likely be enough to encourage the RBA to pause at the April meeting also.” There was some semblance of calm in early Asia trading on Monday when US financial regulators moved to assure all depositors their money is safe following the collapse of Silicon Valley Bank and set up a new lending programme offered by the Federal Reserve with funds from the Treasury Department. BLOOMBERG