RBA Board opens the door to a pause in April

The Reserve Bank of Australia (RBA) lifted the official cash rate by 25 bps to 3.6 per cent on Tuesday, marking the 10th consecutive hike since May 2022. The Minutes emphasize a high degree of uncertainty; do not take into account the global banking disruptions; and point to a pause in April.

Australias central bank has a “completely open mind” about its April policy meeting and will be guided by key economic data on whether to raise interest rates further or pause tightening, Governor Philip Lowe said.

The Reserve Banks rate-setting board will closely monitor reports on employment, inflation, retail sales and business surveys ahead of its April 4 meeting, Lowe said in response to a question in Sydney on Wednesday.

“If collectively they suggest the right thing is to pause then we‘ll do that, but if they suggest that we need to keep going we’ll do that,” the governor said at an Australian Financial Review conference. “So weve got a completely open mind about what happens at the next board meeting.”

The Minutes of the Reserve Bank Board meeting on March 7 highlight that unlike recent meetings when several policy options were considered the March meeting only considered the case for 25 basis point increase – the resulting decision.

However the Minutes note that “Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for economy.”

There is considerable discussion of market pricing in the Minutes. “ Market pricing implied a 25 basis point increase in the cash rate at the March meeting and suggested that the cash rate would peak at around 4.25% in the second half of 2023,” – with the market response to the global disruptions to the financial sector this pricing has fallen to below 3.6%; that is no further rate hikes with the possibility of rate cuts.

Similarly on international markets the Minutes refer to, “Market participants expectations of the path policy rate in advanced economies had shifted up since the previous meeting.” Now, market pricing for the FOMC is predicting a series of rate cuts over the course of 2023.

Westpac has been forecasting a pause at the April meeting – the strong emphasis on uncertainty in the March Minutes; the unusual commitment to consider a pause in April; and developments in market pricing and global financial markets all support that view.

But the Minutes continue to make a strong case for the need to reign in the “too high” inflation. This challenge is likely to be just as apparent at the May meeting, when much more information will be available on the inflation challenge, requiring a “final” 25 basis point tightening.