By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The March RBA Board Minutes contain little new information for market participants –the April Board meeting is ‘live’ and members will consider the case to leave policy on hold.
- Recent communication from the RBA strongly hints that the Boardwould like to pause in their tightening cycle at the April meeting if the upcoming retail trade and inflation data provides evidence that demand is sufficiently cooling in the economy.
- The recent turbulence in global financial markets due to the failure of Silicon Valley Bank is likely to be a secondary consideration for the Board at the April meeting given the Australian banking system is very well regulated and capitalised.
- We continue to marginally favour a 25bp rate hike in April, but that call will be under review over the next two weeks.
All eyes now on February retail trade and the monthly CPI
The March Board Minutes largely confirm what market participants already knew. Namely, the April Board meeting is ‘live’ and the RBA will consider the case to leave policy on hold or increase the cash rate by a further 25bp.
The RBA still has a tightening bias, which was reaffirmed in the Minutes:
“Members observed that further tightening of monetary policy would likely be required to ensure that inflation returns to target and that the current period of high inflation is only temporary.”
“Members noted that the staff’s most recent forecasts were for inflation to return to the 2–3 per cent target only by mid-2025, and this was on the assumption that the cash rate is increased a little further” (our emphasis in bold).
By the same token, the RBA has stated that, “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.”
Reading between the lines it is clear that the RBA would like to pause in the tightening cycle. But the Board wants to see sufficient evidence in the domestic economic data that demand is cooling.
Regular readers will be aware that we believe a pause would be the appropriate policy move at this stage given the RBA has put through an incredible amount of tightening in a short space of time. And monetary policy works with the well documented ‘long and variable lags’. This is something RBA Assistant Governor Christopher Kent covered in his speech on Monday.
But two weeks ago, RBA Governor Lowe flagged four domestic data releases that would largely inform their decision at the April Board meeting -the February NAB business survey (14/3), February labour force survey (16/3), February retail sales (28/3) and the February monthly CPI indicator (29/3).The Minutes today reiterated this point.
Two of those data releases have already printed. The NAB Business Survey was robust. And the unemployment rate dipped to 3.5% in February from 3.7% in January. Those two pieces of data based on the Board’s reaction function for the April meeting would lend weight to another rate increase.
However, retail trade in February based on our internal looks like it will post a small decline on the month (CBA forecast -0.3%). And the February monthly CPI indicator could show sufficient signs that inflationary pressures are starting to dissipate. The RBA Board would likely lean into that data to justify a pause in April.
At this stage it looks like a coin toss as to whether the RBA leaves the policy rate on hold in April. We will finalise our call once retail trade and the monthly CPI has been published.
Finally, we note today that the Minutes today referenced our wages data: “a range of timelier measures, such as newly lodged enterprise agreements and the estimate derived by CBA from its banking data, pointed to wages growth remaining solid in the March quarter”.
Here we will simply add that while the annual rate of wages growth as measured by our internal indicator has continued to lift (currently ~3.6%), the level remains consistent with the inflation target.
