Minutes from the Reserve Bank of Australia’s (RBA) April board meeting have been published, indicating its decision to keep rates on hold at 3.6 per cent was tighter than markets had anticipated.
The monetary policy board members discussed the case for both a hike and pause to the cash rate, ultimately opting to halt the tightening cycle to provide “additional time” to assess the impact of 350 bps in cumulative increases to the cash rate since May 2022.
“Members recognised the strength of both sets of arguments, but, on balance, agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings,” the minutes noted.
“Members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much more monetary policy would need to be tightened to bring inflation back to target within a reasonable timeframe.”
Supporting the case for further tightening was the resilient labour market, “strong” business conditions and elevated inflation, which “remained too high”.
Moreover, imbalances between demand and supply in the housing and energy markets could “limit how quickly inflation declines”.
Notably, projections for population growth could put “significant pressure on Australia’s existing capital stock”, particularly the housing market.
“[Members] observed that there were already signs that the recent fall in housing prices might be smaller and more short-lived than expected,” the board minutes noted.
Conversely, the central bank noted parts of the household sector are “under financial stress” and would need to “scale back their spending to minimise the need to draw upon savings”.
“Members discussed the uncertainties surrounding the impact that this historically rapid increase in interest rates would have on the economy,” the RBA observed.
“They noted that there were already signs that tighter monetary policy had contributed to a slowdown in the housing market, a material slowing in consumption growth, and financial pressure for a segment of households with housing loans.”
Looking ahead, the RBA said it would assess key economic indicators “over the coming month”, particularly the quarterly consumer price index, labour market data, housing spending figures, business conditions indicators, and developments in the global economy.
The Reserve Bank is also expected to be informed by updated forecasts for the economic outlook, which would help determine the “extent to which monetary policy would need to be tightened further”.
Minutes point to ‘shorter pause’
Reflecting on the minutes, ANZ Research said it casts doubt over the group’s projections for one final 25 bps hike in August.
An “upside surprise” to the upcoming quarterly CPI data would support an earlier than expected resumption of monetary policy tightening.
“These minutes would tend to support that view — and indeed suggest that risks are tilted to a shorter pause than we currently anticipate,” ANZ Research observed.
According to the Commonwealth Bank, the RBA’s May decision is “live”, agreeing it would hinge on the quarterly CPI result.
“The Q1 23 CPI, to be published next week (26 April), could make or break the case for the RBA to raise the cash rate at the May board meeting,” CBA noted.
CBA’s base case is for one final 25 bps hike in May, taking the cash rate to a peak of 3.85 per cent, but acknowledged it would be a “line ball call”.
The bank said it expects a marked slowdown in aggregate economic activity to pave the way for monetary policy easing in the back end of 2023.
“We continue to look for rate cuts in late 2023 as we believe inflation will fall more quickly than the RBA currently anticipates, [and] that the unemployment rate will lift more sharply,” CBA noted.
However, during his recent address to the National Press Club in Sydney, RBA governor Philip Lowe said the central bank does not envisage a shift to an easing bias any time soon.
“I do think it’s premature to be talking about interest rate cuts,” he said.
“Remember, we’ve got the highest inflation rate in 30 years, the lowest unemployment rate in 50 years, and still two years before we get inflation back to the top of the target range.
“So, I think it’s too early, way too early, to be talking about interest rate cuts and the balance of risk lie to further rate rises, but it will depend upon the data.”
The governor went on to note the central bank is prepared to keep interest rates “higher for longer”.
“If we need to keep interest rates higher for longer to make sure that inflation comes back to 2 to 3 per cent range [in a] reasonable time, we’ll do that,” he said.
“But that will be determined by the flow of events.”