By referring to tightening policy with issue about timing of further hikes the RBA is increasing its options – our view is that with the inflation outlook still too high it is too early to pause in April.
The Reserve Bank Board lifted the cash rate by 25 basis points from 3.35% to 3.6%.
While this decision was widely expected the real issue was the guidance in the Governor would provide for the future.
He chose to use the words, “The Board expects that further tightening of monetary policy will be needed to ensure inflation returns to target ….In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”
The compares to the February Statement which noted, “The Board expects that further increases in interest rates will be needed over the months ahead … in assessing how much further interest rates need to increase.”
Note that in February the issue was around “how much” whereas in March it has become “when and how much.”
The assessment of those issues that the Board is following with respect to future policy the Statement provides the following insights:
- The monthly CPI suggests that inflation has peaked.
- At the aggregate level wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another.
- The Board remains alert to the risk of a price-wage spiral given the limited spare capacity in the economy.
- Household consumption growth has slowed. But in contrast, the outlook for business investment remains positive.
- Rents are increasing at the fastest rate for some years.
- Employment fell in January but that reflects changing seasonal patterns.
These insights indicate that, as should be expected, the accumulation of ten consecutive rate hikes is having an impact on the economy.
We had been expecting that the Board would continue to point to higher rates with ‘guidance’ along the lines of “The Board expects to increase interest rates further over the period ahead.”
In referring to monetary tightening rather than interest rates the case could be made for a very different message but the second line in the paragraph – “when and how much further interest rates need to increase” – returns the theme to interest rates rather than wider policy and adds a notable “when”.
For these reasons the case can certainly be made for a pause in April.
But we cannot overlook that the Board still has a very strong tightening bias and, by April, will still not be forecasting that inflation will return to the 2–3% target zone before mid 2025.
Recall a key reason for dismissing a pause at the December meeting was that “inflation was expected to take several years to return to the target range.”
Since then, markets have also lifted the profile for the federal funds rate by 50 – 75 basis points despite the FOMC’s forecasts expecting to lower inflation to 3.3% in 2023 compared to the RBA’s “target” of 4.75% by end 2023.
Conclusion
There is some clear evidence in the Governor’s Statement that a pause can be expected in April but the big picture for inflation has not improved sufficiently to justify that call.
We continue to expect rate increases in both April and May.
Nevertheless we will be assessing the Governor’s speeches over the next few weeks and the critical information in the Board Minutes to see whether the case for an imminent pause is justified.
