What the latest US interest rate hike means for Australia as America is gripped by banking crisis

  •  US Fed hiked rates by 0.25 percentage points
  • This could be last, implications for Australia 

The latest American interest rate rise could be the last as recent bank collapses stir concerns about global financial market instability - but it could help the Australian dollar.

For Australia, this could see the Reserve Bank pause a planned rate rise in April and reconsider a possible May rate rise.

The US Federal Reserve on Wednesday night raised the key federal funds rate by 0.25 percentage points to 4.75 per cent to 5 per cent.

But in an accompanying statement, US Fed's Federal Open Market Committee predicted 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 to weigh on economic activity, hiring, and inflation,' it said.

'The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.'

The US Federal Reserve (chairman Jerome Powell, pictured) on Wednesday night raised the key federal funds rate by 0.25 percentage points to 4.75 per cent to 5 per cent but noted 'Recent developments are likely to result in tighter credit conditions for households and businesses'

The US Federal Reserve (chairman Jerome Powell, pictured) on Wednesday night raised the key federal funds rate by 0.25 percentage points to 4.75 per cent to 5 per cent but noted 'Recent developments are likely to result in tighter credit conditions for households and businesses'

During the Global Financial Crisis in 2008, concerns about financial instability led to a credit crunch, which was only resolved when the American government bought unwanted corporate bonds at great cost to inject liquidity into financial markets.

Westpac senior economist Elliot Clarke said the US Fed was now more likely to focus on maintain financial stability, even though inflation is still high.

'March's 25 basis point hike is likely to be the last for this cycle as banking sector uncertainty tightens financial conditions and weighs on growth,' he said.

Mr Clarke noted the US Fed's language meant it was less fixated on tackling inflation at all costs, with the latest statement saying 'some additional policy firming may be appropriate' compared with February's declaration that 'ongoing increases in the target range will be appropriate'.

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

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

The latest U.S. rate rise 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 surged by 7.8 per cent in the year to December, the fastest pace since 1990 and well above the RBA's 2 to 3 per cent target.

A monthly measure of inflation for February is due out on Wednesday next week but the RBA believes Australia's inflation has peaked. 

The Australian cash rate of 3.6 per cent is at an 11-year but it is well below the US level of 4.75 per cent to 5 per cent.

This explains why the Australian dollar is only worth 67 US cents despite iron ore prices being at elevated levels.

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

A pause in US rate rises could help the Australian dollar, with a stronger currency more likely to make imports cheaper, helping to bring down inflation.

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

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

But the Australian dollar can also stumble if global financial market turmoil affects risk appetite and demand for commodities whose fortunes are tied with economic activity.

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

The Reserve Bank's March 7 meeting minutes, released this week, hinted at a rate rise pause in April, noting unforeseen developments with international banking.

'They agreed that upcoming releases on employment, inflation, retail trade and business surveys would provide important additional information, as would developments in the global economy,' it said.

'Members agreed to reconsider the case for a pause at the following meeting, recognising that pausing would allow additional time to reassess the outlook for the economy.'