The RBA strongly signals a pause in April

1. The RBA seems likely to pause in raising interest rates next month

Unlike the December board meeting, where the policy choice was between a pause, a 25bp rate hike, and a 50bp rate hike, and the February meeting, where the choice narrowed to either a 25bp or 50 rate hike, today’s RBA board minutes did not reveal the choice presented at the March policy meeting. 

However, the minutes did disclose that the board would consider pausing in April given “most important data released over the prior month – covering GDP, the labour market, wages and inflation – had all been a little softer than expected”, and where subsequent global market volatility is likely to reinforce the case for holding steady for at least a month. That is, the minutes noted: 

“Members noted that it was not yet possible to determine how these various considerations [about policy and the economy] would balance out. They agreed that upcoming releases on employment, inflation, retail trade and business surveys would provide important additional  information, as would developments in the global economy. Members agreed to reconsider the case for a pause at the following meeting, recognising that pausing would allow additional time to reassess the outlook for the economy. At what point it will be appropriate to pause will be determined by the data and the Board’s assessment of the outlook.” 

At the same time, the RBA dropped the reference from the February minutes that, “members agreed that further increases in interest rates are likely to be needed over the months ahead to ensure that inflation returns to target and that the current period of high inflation is only temporary”

2. Recent global financial instability should reinforce the RBA’s existing preference to pause in raising interest rates, where cuts are possible if the instability morphs into a global financial crisis.

Recent global market volatility poses some downside risk to the economic outlook for Australia via the potential impact on world growth, bank funding costs, confidence, stock prices and the lending practices of the local subsidiaries of global banks, where the RBA has an informational advantage over the market via its access to APRA’s confidential survey of bank lending standards. 

The exact effect is hard to quantify and would be partly offset by a lower exchange rate, although the market has factored in a substantial impact as it now prices in rate cuts on the implicit assumption that further financial instability evolves into a world financial crisis. 

The abrupt switch in market pricing from rate hikes to rate cuts seems an overreaction at this stage, particularly when central banks have developed a larger policy toolkit in the wake of the global financial crisis and with an immediate and aggressive policy response to the financial volatility to date. 

That said, history has shown that the RBA, like the Fed, has responded to financial crises by cutting rates, where cuts were not long followed by rate hikes in the 1987 and 1998 episodes of global instability given the economic fall-out was limited, and where cuts proved more lasting in the 1990-92 episode of local bank/non-bank failures and in the 2007-09 global financial crisis, given those instances involved significantly higher unemployment and lower underlying inflation.

3. The RBA review panel provides its recommendations to the treasurer on 31 March.

Although not mentioned in today's minutes, the RBA review panel provides its recommendations to the treasurer on 31 March, which the advice should come as no surprise to him given he has said that he is in close contact with the panel. 

The treasurer has said that he will provide the government’s initial response to the recommendations by the mid-May budget. 

The government will also decide whether to reappoint Governor Lowe around the middle of the year, when it seems likely that the treasurer will actively search for his replacement, with panel chair and former Bank of Canada Senior Deputy Governor Wilkins an obvious candidate. 

Separately, note that Governor Lowe is talking at the National Press Club the day after the 4 April policy decision, where past speeches to the press club have focused on the outlook for the year ahead.