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Silicon Valley Bank developments overtake RBA, but important data points this week if things settle

• The RBA Governor set the hounds running last week by suggesting the Bank was closer to considering a pause in its interest rate tightening cycle to allow a fuller assessment of the cumulative impact of its rate rises since last May on the economy.
• This is wise given the lags in the operation of monetary policy, though the Board will continue to monitor incoming data closely as it tries to balance the risks of not doing enough tightening to bring inflation back to target in a timely fashion against doing too much and causing the economy to slow more than is necessary.
• Events offshore have clearly overtaken many of the Governor’s comments last week. Markets and investors need to consider the extent to which these developments represent idiosyncratic factors related to business models of a number of banks, versus the first signs of potentially broader challenges for global economies from the very rapid tightening of monetary policy enacted over the past year. The early response of government regulators to guarantee all deposits of the failed Silicon Valley Bank has no doubt been helpful in reducing contagion risks.
• NAB’s view has been that the complex set of circumstances emanating from the pandemic might lead central banks to overtighten as unmet labour demand and pent-up demand for services kept labour markets tighter and inflation higher for longer than expected. At the same time, tighter liquidity conditions for technology companies have been developing for some time, and presumably lending appetite for this sector will tighten further because of the current ructions. Appetite for lending for real estate is likely also tightening as interest rates rise.
• Markets have moved to quickly price out much of further tightening moves and to reinstate the prospect of US rate cuts later this year. The latter has been NAB’s forecast for some time. Much will depend on whether things settle quickly or not. The RBA will have three weeks to consider how the SVB situation develops. We continue to assess that we are getting closer to the peak of the rate cycle in the US and Australia.

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