RBA considering pause in April

Members of the board of the Reserve Bank of Australia (RBA) were already considering the possibility of pausing at the upcoming April meeting in the lead-up to the recent collapse of three US banks and the issues at Credit Suisse, minutes of the March meeting have revealed.

The minutes, published on Tuesday (21 March), detailed that at the March board meeting, the RBA board unanimously agreed that the upcoming releases on employment, inflation, retail trade, and business surveys would provide “important additional information”, as would “developments in the global economy”.

“At what point it will be appropriate to pause will be determined by the data and the board’s assessment of the outlook,” the bank said.

Despite the markets’ initial scepticism regarding the likelihood that the RBA could pause its rate hike cycle in April, economists are now considering a pause as the more likely course of action.

So, what’s changed in two weeks?

The collapse of three US-based regional banks — partly attributed to poor liquidity management exposed by aggressive monetary policy tightening — has undermined confidence in the global banking system, impacting established institutions like Swiss juggernaut Credit Suisse and spooking the financial markets in the US and Europe.

Given the concerns about the health of the global banking system, Australian markets have pivoted to predict a halt to rate hikes in April.

Namely, the ASX Rate Indicator demonstrated that the probability of a hold stood at 68 per cent as of 20 March, with a 32 per cent chance of a rate decrease — a sentiment the RBA is expected to consider according to Westpac’s Bill Evans.

In his response to the RBA minutes, the chief economist drew attention to the board’s “considerable discussion” of market pricing at the March meeting — including the expectations of the path of policy rates in advanced economies.

Prior to the recent global financial disruption, market pricing for the Australian cash rate implied a peak of 4.25 per cent in the second half of 2023, but that has since fallen below 3.6 per cent.  

“Clearly the board takes market pricing into account. At the time of the board meeting market pricing supported the view that, in the case of the RBA, nearly 75 more basis points of tightening were likely to follow the March meeting. Now that pricing has fallen away completely,” Mr Evans said.

Global events aside, Mr Evans also highlighted signs of uncertainty in the bank’s most recent minutes regarding local data. He assessed that while the RBA made a strong case for the increase at the March meeting, it also emphasised considerable doubt going forward.

Namely, while acknowledging weaker-than-expected GDP and labour data, the RBA said on 7 March that “it would be prudent not to place too much weight on one period’s data”, while also conceding that “it was appropriate to take some signal from the consistent pattern across recent data releases”.

The RBA board’s uncertainty was further highlighted through its mixed messaging as seen in phrases such as “monetary policy was in restrictive territory and that the economic outlook was uncertain” and “members noted that it was not yet possible to determine how these various considerations would balance out.”

And while the key points remained clear, that “core inflation remains too high” and that the “staff’s most recent forecasts were for inflation to return to the 2–3 per cent target only by mid-2025”, Mr Evans said, “we expect that the case for a pause in April is supported in these minutes”.

“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,” the economist said, but added that a further 25-bp hike could be on the cards for May.

Similarly, CBA assessed the bank’s communication “strongly hints” that the board could pause its tightening cycle at the April meeting.

It flagged, however, that it would only do so “if the upcoming retail trade and inflation data provides evidence that demand is sufficiently cooling in the economy”.

For CBA, the recent turbulence in global financial markets is likely to be a secondary consideration for the board, given the Australian banking system is “very well” regulated and capitalised.

The big four bank conceded that it continues to “marginally favour” a 25-bp rate hike in April but added that that call would be under review over the next two weeks.

ANZ also stated that its base case remains for another 25-bp hike at the April meeting, assuming, however, that financial market volatility recedes and that the monthly CPI data remains relatively high.

“Like the RBA we will, however, be considering all the information available as we get closer to the meeting,” ANZ said.

Similarly, speaking in a webinar to commercial brokers on Tuesday (21 March), NAB chief economist Alan Oster said: “We don’t know [what will happen at the RBA April meeting], is the honest answer. It’s a lot more complicated ... If there is another ‘wounded gazelle’ out there somewhere, and there is a run on it, and things are still worried, then the [RBA] will be on a pause and on the watch.

He continued, however, that if the RBA does pause in April to take stock of the impacts of the financial markets, he suspected that they will hike again in May and June.

Mr Oster said: “I’m a bit more inclined to say, well, provided this thing doesn’t get into trouble... that the RBA might have a couple [more hikes] to go, but they’re getting close on the other side.

“Maybe they do a pause if things are still upset in April (and some Reserve Bank minutes came out today which sort of say they’re going to look at it), but — depending on the local data — we think they’re not finished [on their hiking cycle].

“We think they’ll do at least one more [rise], so it may either get you to 3.85 or 4.1 per cent, and then go to rate cuts.

“Famous last words here, but I don't expect to see the financial problems continuing for the next three weeks.”

Ultimately, as the April meeting approaches, the RBA faces the task of analysing several crucial pieces of information, including the February CPI data, the retail sales report, and the interest rate decision of the US Federal Reserve.

[Related: ‘Let’s be clear. This is an emergency rescue’: UBS]