By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The RBA Minutes today indicate the Board debated the case to raise the cash rate by either 25bp or 50bp in November.
- The Board settled on a 25bp increase as the cash rate had been increased materially in a short period of time and that there were lags in the operation of monetary policy.
- The Minutes note that having slowed the pace of tightening down in October, “acting consistently would support confidence in the monetary policy framework among financial market participants and the community more broadly.”
- The Minutes once again reiterate that the Board is not on a pre-set path and importantly note that, “the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook.”
The Minutes
RBA Board Minutes for the months that coincide with the release of a quarterly Statement on Monetary Policy (SMP) generally don’t contain much new information. Today was largely no exception. That said, the November Board Minutes provide some insight into what was ‘on the table’ at the meeting earlier this month where the RBA raised the cash rate target by 25bp to 2.85%, the second consecutive 25bp lift.
In addition, the Minutes reiterate a key recent theme that was first aired by the Governor on the same day as the November Board meeting. Namely that, “the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook”.
The notion of pausing in the tightening cycle has now appeared in every piece of RBA communication since the Governor’s remarks at the Reserve Bank Board dinner on 1 November. This communication comprises the Board dinner, the November SMP, Deputy Governor Michele Bullock’s 9 November appearance at the Australian Business Economists dinner (Q&A session) and her appearance before the Senate Economics Legislation Committee (Budget Estimates) the following day.
In short, the RBA has stated on five consecutive occasions over the past two weeks that it is willing to keep monetary policy on hold for a period. Such a move would see the RBA retain a tightening bias. That is, the Board would be willing to move the cash rate higher if the economic data and outlook warranted further rate increases (the Board has not ruled out returning to larger rate hikes if the situation warranted). By the same token the Board may come to the conclusion that the economy does not require further rate rises. Indeed our analysis indicates that taking the policy rate above 3.10% and deeper into restrictive territory would be inconsistent with keeping the economy ‘on an even keel’.
We are encouraged that the RBA is open to the idea of pausing and that they continue to reiterate this new message. Our central scenario for a peak in the cash rate of 3.10% is premised on the notion that the RBA will pause after an expected 25bp rate hike in December. Some softening in the activity data over summer, as we expect, would support such an approach to policy setting early next year.
The Minutes note that at the November Board meeting, “members again considered two options for the size of the increase in the cash rate: a 25bp increase or a 50bp increase”. Regular readers will be aware that we thought both options would be on the table again at the November Board, but we favoured another 25bp rate hike, as was the case in October.
According to the Minutes, “the arguments for a 25bp increase rested largely on the fact that the cash rate had been increased materially in a short period of time and that there were lags in the operation of policy”. This statement is consistent with the rationale to slow the pace of tightening down at the October Board meeting.
The Minutes also note, “in considering the size of the increase, members also discussed the value of the Board acting in a consistent manner. Having moved by 25bp in the previous month, they considered whether the flow of information since then warranted a 50bp move at the November meeting. The Board agreed that acting consistently would support confidence in the monetary policy framework among financial market participants and the community more broadly.”
This statement indicates the hurdle to raising the cash rate by 50bp at any given meeting is now very high. Indeed we think the November Board meeting was the last time over this tightening cycle that a 50bp rate hike will be considered. Our expectation is that over the period ahead the debate at each Board meeting will be between leaving the cash rate on hold or raising it by 25bp.
The rest of the Minutes essentially reiterate the themes from the November SMP.
The outlook
Over the next two days the ABS will publish key data which relates to the labour market. An update on wages growth over the September quarter (i.e. the Q3 22 Wage Price Index) and the unemployment rate in October will be critical inputs into the RBA’s policy deliberations at the December Board meeting.
Our central scenario is for the RBA to raise the cash rate by 25bp at the December Board meeting. But given the RBA has flagged the idea of pausing in the tightening cycle a rate hike in December is not a done deal, particularly if the data over the next two days comes in softer than anticipated.
We expect the peak in the cash rate to be 3.10% (to be reached either next month in December or February 2023). The risk lies with a higher cash rate of 3.35%. Financial markets have currently priced a peak in the cash rate of 3.85%, to be reached in Q3 23. We believe that if such pricing is realised the Australian economy will not have a soft landing and the unemployment rate will rise materially above the level consistent with full employment. Such an outcome is not what the RBA is trying to achieve.
