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From dovish to slightly hawkish: Bank views split on RBA minutes

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The big banks are divided in their interpretation of the RBA’s latest minutes.

The Reserve Bank’s (RBA) March minutes have been perceived by most as a move closer to a neutral stance, but while the CBA said they confirmed the evolution in the bank’s policy bias, ANZ emphasised the retention of a hawkish bias, albeit a mild one.

According to the CBA, the March minutes are the “most dovish” piece of communication from the board since the RBA commenced its tightening cycle in May 2022.

Namely, the RBA, for the first time in a long time, said it didn’t consider the case to raise the cash rate at its March meeting.

The minutes’ state that “members agreed that returning inflation to target remained the board’s highest priority and that it would take some time before they could have sufficient confidence that this would occur within a reasonable timeframe. At the same time, members noted the importance of preserving as many of the gains in the labour market as possible”.

According to Gareth Aird, the head of Australian economics at CBA, this signals a shift towards a neutral policy bias.

“Since the RBA commenced its tightening cycle in May 2022, the minutes have canvassed what the board considered at each policy meeting.

“More specifically, at each meeting that the board decided to leave the policy rate unchanged, the case to raise the cash rate was also considered. But in the minutes today, it is apparent that the board did not discuss the case to tighten policy in March,” Aird said.

While the CBA believes the board is hesitant to acknowledge the possibility of a rate cut as the likely next move, Aird pointed to the RBA’s economic forecasts, which are premised on the cash rate staying near its current level of 4.35 per cent until mid-2024, then decreasing to about 3.25 per cent by mid-2026.

“Given the minutes today note that the economy is, ‘tracking broadly as (the RBA) expected’, the board behind closed doors will view the likely next move in the cash rate as down. But it is too early for the board to shift to an easing bias,” Aird said.

“We remain comfortable with our base case. Our central scenario sees the RBA commence an easing cycle in September 2024 – we have 75 bp of rate cuts in our profile in late 2024 and a further 75 bp of easing in H1 25, which would take the cash rate to 2.85 per cent.”

Conversely, Aird’s optimistic tone was somewhat challenged by ANZ’s economist who declared the presence of the mildest of hawkish biases in the RBA’s latest minutes.

Economists Catherine Birch and Blair Chapman said: “We still expect the RBA will be on hold until November, with the possibility of earlier cuts reduced by the very strong February labour market data, which was released after the RBA’s March meeting.”

Feeding their prediction is the RBA’s commitment to take necessary actions to achieve its inflation target, as well as the board’s evaluation of the risks surrounding its outlook.

“On the upside, there remained a risk that inflation would take longer to return to target than currently expected, resulting in an upward shift in inflation expectations,” the RBA said.

“On the other hand, members noted the risk that weakness in consumption could continue for longer than expected,” the bank continued.

“On balance, members considered that the relative probability of these two sets of risks had become a little more even, as the incoming data had not indicated a materialisation of upside risks to inflation and as growth in output had slowed as expected.”

According to Birch and Chapman, the assessment that risks have become somewhat more balanced implies that the balance is not yet entirely neutral.

“The board also expressed some concern that productivity growth may not pick up to the extent required for stronger wage growth to be consistent with target inflation. The board “considered the implications for monetary policy if productivity did not pick up as assumed.” On the face of it, this does not shut the door to further tightening,” the economists explained.

Ultimately, they said, whether the board gets to neutral at the May meeting will depend on the first quarter CPI and March labour market data printing in line with expectations.

Westpac’s Luci Ellis holds a middle-ground perspective, with the big bank predicting that the RBA will reach the required level of assurance about the path of inflation later in the year.

“We continue to expect the first rate cut to occur at the late-September board meeting,” Ellis said.

She described the board’s current positioning as a “happy medium” after it endorsed the language of not ruling anything in or out.

“The current level of the cash rate is assessed as being just right for the time being, but things could change. The board also picks a happy medium as the future model for implementing policy.”

Last month, governor Michele Bullock downplayed signs of a shift in the bank’s policy despite the bank’s change in wording to indicate that it was “not ruling anything in or out”, departing from its usual bias towards rate hikes.

Elaborating on “in or out”, Bullock said: “What the board is basically saying is we’re uncertain, we don’t know, we can’t rule in or out either.”

“We still believe we’re firmly on the narrow path,” she noted.

Regarding the possibility that the bank could entertain rate cuts later this year, the governor said the board would need more “confidence” that inflation is “coming back into the band”.