MNI RBA WATCH: Pause Priced In Despite Persistent Inflation

The Reserve Bank of Australia is expected to pause its tightening cycle at its April 4 board meeting, but a 25bp hike is not out of the question as it continues to battle inflation persistently well in excess of its 2-3% target.

Another 25bps would be the sixth consecutive quarter-point increase and 11th cumulative hike since the Reserve began tightening from a record low 0.1% in May 2022 and would push the official cash rate to an 11-year high of 3.85%. A pause would mean the RBA slips further behind its international peers.

February’s economic data, which Governor Philip Lowe has said would be key determining factors at the April meeting, has sent mixed signals. (See: MNI BRIEF: RBA's Lowe Says Pause In April Depends On Data).

MIXED DATA

Monthly consumer price inflation continued to soften more quickly than the RBA’s forecast, falling to 6.8% y/y from 7.4% in January and from December’s peak of 8.4%, while retail sales growth slowed to 0.2% from 1.8%. But the economy added a better-than-expected 64,600 jobs as unemployment fell to a near-50 year low of 3.5% from 3.7% the month before, March 16 data showed.

But, while business sentiment waned in February, conditions remained strong, with firms reporting strong price and cost growth.

Monthly CPI is also less accurate than the quarterly series – not due until April 26, and a higher print could mean a pause is short-lived, and prompt the Reserve to catch up in May. Inflation was not tipped to near 6.5% until June , according to the RBA’s last Statement on Monetary Policy.

Markets expect a pause, with AUD overnight indexed swaps even implying a 25bp cut by December – a significant repricing. Prior to the March meeting, OIS pointed to 4.3% by December.

UNCERTAINTY ABOUNDS

The RBA shifted to a more hawkish tone prior to the March meeting (See MNI RBA WATCH: Hawkish Shift Puts 25bps On Table In March). While concerns over a potential credit crunch could change its calculations, central banks in the U.S. and Europe have proceeded with hikes despite concerns over their respective banking systems, and the Reserve could likewise prioritise the fight against inflation.

Housing, as ever, is the elephant in the room. The RBA has consistently said the effect of monetary policy will lag as mortgages – particularly those written when the interest rate was at its lowest – move from fixed into higher variable rates. With about half of the country’s AUD650 billion fixed-rate mortgages set to roll off this year, that lag could finally close. But RBA Assistant Governor Chris Kent recently noted that inflation was the greater danger to mortgage holders.

Further insight into the RBA’s thinking after what will be a difficult decision will come on April 5 when Lowe addresses the National Press Club.