There are four ways to predict interest rate changes

The ASX RBA rate indicator calculates the probability of interest rate movements based on what investors are paying for ASX 30 Day Interbank Cash Rate Futures. These futures are purchased to accommodate fluctuations in the overnight cash rate. Since the start of last week, the index has moved from showing an almost certain hold in the cash rate in April to a 46 percentage chance of a rate cut. This a distinct change from last month when it was looking like there were at least two more rate rises to come.

What has brought about the change in outlook? The main driver are problems in the banking sector overseas. The bank run at Silicon Valley Bank (SVB) in the US on March 10 kicked it off and has now escalated to the takeover of Credit Suisse by UBS last week.

It is highly unlikely we will see a similar situation playing out with Australian banks. SVB’s collapse came about because they were betting on interest rates to remain ultra low for a long time and were holding a lot of long term bonds. Interest rate increases meant the value of the bonds collapsed and a bank run resulted. Credit Suisse’s problems have been a long time coming and problems in US banks exacerbated negative sentiment towards them.

In Australia, our banks hold a very low proportion of tradable securities and also have significant liquidity should a bank run begin. While this is the case, Australia is still not immune to a shaky global financial situation and the RBA needs to move more carefully.

While financial system woes are key to the change in sentiment, the economy is slowing and inflation is coming down. This week we will get a clearer picture of inflation with February data being released on Wednesday. While housing costs are still problematic, particularly rents, many of the other items that were seeing price growth last year are now easing. Interest rate rises also don’t have an immediate impact on activity. As we saw last year, consumers continued to buy up big, travel and eat out even though the cost of living was rising rapidly. The increases we saw last year will continue to have an impact on activity this year, even if we do start to see declines.

The odds of a rate rise are increasing, however, at this point, it does seem likely that a rate hold for April is most likely. House prices started moving upwards again in December and if interest rates have now peaked, they are set to continue to rise in 2023.