RBA Considered Quarter-Point Hike Before Deciding on Pause

Australia’s central bank discussed the case for raising interest rates by 25 basis points at its April meeting before deciding there was a stronger argument to pause its almost yearlong tightening cycle and wait for more data on the economy’s outlook.

(Bloomberg) — Australia’s central bank discussed the case for raising interest rates by 25 basis points at its April meeting before deciding there was a stronger argument to pause its almost yearlong tightening cycle and wait for more data on the economy’s outlook.

“Members recognized the strength of both sets of arguments, but, on balance, agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings,” minutes of the Reserve Bank’s April 4 gathering showed Tuesday.

“Members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much monetary policy would need to be tightened to bring inflation back to target within a reasonable timeframe.”

The pause followed 10 consecutive hikes that took the cash rate to 3.6% from a record low 0.1% in May. The minutes had a hawkish tone, with the board suggesting that rates may need to be increased at subsequent meetings as inflation remains “too high” and the labor market is “very tight.”

The case for standing pat also “rested on the observation that monetary policy had already been tightened significantly in a short period” to restrictive territory and the full effects are yet to be felt given lags, the minutes showed.

Since the April board meeting, labor market data showed employment growth surpassed expectations in March, underscoring the economy’s resilience. With the RBA’s tightening bias reinforced, all eyes will now be on next week’s first-quarter inflation report.

“The decision to pause was a relatively close one – with a case able to be made for both an increase in interest rates and a pause,” said Adam Boyton, an economist at Australia & New Zealand Banking Group. “It also suggests that the May meeting is live.”

Financial market pricing implies the RBA is all but done with rate hikes, while economists expect at least one more increase to 3.85% in May.

Australia has trailed international peers in the scale of its rate increases, reflecting Governor Philip Lowe’s efforts to bring the economy in for a soft landing. The minutes showed the board is still aiming to navigate the narrow path of bringing inflation down “while keeping the economy on an even keel.”

The arguments to keep hiking also included:

  • RBA forecasts for inflation to return to its 2-3% target were conditioned on further tightening
  • Overseas experience showed high inflation could be more persistent than expected
  • Imbalances between demand and supply in housing and energy markets may limit the pace of price declines
  • Most households were in a strong financial position to absorb higher borrowing costs
  • Upgrades to near-term projections for population growth which could prove inflationary
  • Increased risk of larger wage increases in parts of the economy, including in the public sector

The RBA also included a line on how it would communicate its decision to stand pat. An independent review of the central bank due to be released this month is likely to focus heavily on past communication failures.

“Members observed that it was important to be clear that monetary policy may need to be tightened at subsequent meetings and that the purpose of pausing at this meeting was to allow time to gather more information,” the RBA said.

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