Deutsche Bank share plunge increases odds of a rates pause by the RBA, say economists

Shares in Deutsche Bank plunged 8.5 per cent on the weekend as investors dumped the stock amid ongoing concerns about the fallout from rising interest rates and a string of bank failures and bailouts in the US and Europe.

Regulators in the US and Europe have acted swiftly in recent weeks to shore up the confidence of depositors and investors in the financial system in the wake of the collapse of Silicon Valley Bank and Signature Bank and the emergency acquisition of Credit Suisse by rival UBS.

Treasurer Jim Chalmers on Friday assured that Australian banks remained well capitalised and robust.

But the latest bout of market upheaval is likely to be taken into account by the RBA board, along with monthly updates on local inflation and retail sales due out this week, as it assesses the case hike or hold the official cash rate.

The central bank admits that the effect of the 10 rate increases made since last May are yet to be fully felt, with the high proportion of fixed rate mortgages contributing to an unusually long lag in the impact of changes in monetary policy.

But RBA governor Philip Lowe has said the central bank is getting closer to pausing the current rate hike cycle and at their March meeting the members of the RBA board agreed to "reconsider the case for a pause" when they meet on April 4.

Aside from market volatility, the RBA has indicated it will look closely at updates on inflation, employment, retail sales and business conditions when setting monetary policy.

Two of those updates - on the labour force and the business environment - have already been released, and showed that the unemployment rate dipped to 3.5 per cent last month while trading conditions remand solid.

But Commonwealth Bank's head of Australian economics Gareth Aird tips that data to be released Tuesday will show that retail sales contracted by 0.3 per cent in February while on Wednesday the latest consumer price index will indicate that inflation fell for a second consecutive month to 6.9 per cent.

Mr Aird said the strength of the results could could "make or break the case to pause".

HSBC chief economist Paul Bloxham thinks uncertainty about the impact of large household savings, the pending switch of many mortgages from fixed to variable rates and the effect of rate hikes to date will make the RBA more cautious.

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Mr Bloxham said his rule of thumb was that once the RBA is convinced that inflation has peaked and that the unemployment rate has troughed we expect them to pause.

The HSBC economist said financial market jitters added to the case for keeping rates on hold.

"We see the RBA pausing in April and keeping the cash rate at 3.60 per cent for a number of quarters after that," he said.

According to Mr Aird, on balance he expected the central bank to lift its cash rate to 3.85 per cent in April but forecast it would cut rates by 0.5 of a percentage point later this year and a similar reduction in the first quarter of 2024.

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