$620 billion plunge in household wealth may not be enough for local rates pause in face of US, Europe hikes

By the end of last year, families were 3 per cent poorer than they were a year earlier, including $374 billion of losses from falling property values and superannuation balances that were $247 billion smaller, according to the Australian Bureau of Statistics.

The update on household wealth came as the central bank in the United States hiked its target interest rate despite a spate of bank failures and bailouts, suggesting concerns about financial system stability will not be a significant factor for the Reserve Bank of Australia as it considers whether to raise or pause its cash rate in April.

The US Federal Reserve raised its target rate by 0.25 of a percentage point to 5 per cent because of concerns about persistently high inflation despite acknowledging that "recent developments" in the banking system - the failure of two US regional banks and the bailout of a third - "are likely to result in tighter credit conditions ... and to weigh on economic activity".

The decision by the US central bank follows the move by the European Central Bank last week to lift its interest rate by 0.5 of a percentage point regardless of troubles at Swiss bank Credit Suisse that resulted in its acquisition by rival UBS.

The developments have added to uncertainty about whether the RBA Board will keep its cash rate at 3.6 per cent when it meets on April 4.

At its March 8 meeting, the board agreed to "reconsider the case for a pause" in April.

This, combined with evidence that growth, inflation and wages were softer than expected, has fueled speculation that the central bank will next month call a temporary halt to the succession of rate hikes since last May.

But Judo Bank economist Warren Hogan said the RBA was likely to stick to its "game plan" to raise rates next month before pausing for at least three months to give it time to assess the impact of the rate increases made so far.

Mr Hogan said an April pause made little sense when other major central banks were still hiking rates, particularly given the strength of the labour market (the unemployment rate dropped back to a 50-year low of 3.5 per cent in February), inflation still well above 7 per cent and a 1.4 percentage point differential between official interest rates in Australia and the US.

The economist said although falling house prices had delivered a hit to household wealth, homeowners were still well ahead of where they were before the pandemic struck, and the effect on actual spending was likely to be small.

The ABS said the net worth of households fell 0.4 per cent ($57 billion) in the last three month of 2022, the third consecutive quarter of losses, though this included a $32 billion lift in bank deposits as households took advantage of higher interest rates for savings accounts and term deposits.

The big hit to household wealth has added to the pressure on family finances from a near-record 2.2 per cent fall in real disposable income as soaring inflation, which reached 7.8 per cent late last year, overwhelmed a 3.3 per cent lift in wages to deliver a real pay loss to workers.

Westpac chief economist Bill Evans said there was an "alarming signal around household finances".

While there is evidence that households are increasingly dipping into their savings to support spending, Mr Evans said consumption would ease through this year and next to "very modest levels" and forecast GDP would grow by just 1 per cent this year and 1.5 per cent in 2024.

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Betashares chief economist David Bassanese said the decisions by both the US Federal Reserve and the ECB to raise rates suggested concerns overs global financial stability "should not be a barrier to [the RBA] raising rates again in April".

Mr Bassanse said this made it likely the RBA would base its decision on developments in the local economy, which so far have "remained on the firm side".

The Betashares economist expects the Reserve Bank to hike rates next month but then pause.

Updates on inflation and retail spending next week are expected to be examined closely by the central bank as it assesses the setting of monetary policy.

Mr Evans thinks the RBA will pause in April before one more hike in May, which he expects to be the end of the tightening cycle.

Mr Evans said the Westpac Leading Index, which uses a collection of indicators to point to future conditions, was weak for a seventh consecutive month, suggesting below-trend growth for the rest of this year and into 2024.

"The minutes from the March RBA meeting indicate that the Board intends to consider a pause at its April meeting. This is an unusual step," the Westpac economist said. "Along with the evidence of slowing in the domestic economy, caution around developments in global financial markets will also be a factor in the board's decision."

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