First it was the Bank of Canada which in January announced it would pause its rate hike campaign; then overnight the RBA became the second bank to join the bandwagon when it put its year-long hiking campaign on pause after leaving the cash rate unchanged at 3.6% at April's Board meeting, marking the first pause since the RBA starting raising rates in May 2022. Ahead of the meeting, 19/30 economists surveyed by Bloomberg expected a pause, while 11/30 expected a +25bp hike. Financial markets were pricing in just 4bp of hikes, so the decision was mostly priced in.
The attending statement noted the Board decided to keep rates steady to "assess the impact" of increases in rates to date. While reiterating that Australia's labour market remained "very tight", the statement also noted that timely data suggested CPI inflation had peaked and that a "substantial slowing" in household spending was occurring.
Looking forward, the statement noted the Board expects further tightening "may well be needed", a somewhat softer tightening bias compared to last month ("will be needed").
Here are the main points from the announcement:
The RBA left the cash rate unchanged at 3.6% at April's Board meeting, marking the first pause since the RBA starting lifting the cash rate in May 2022. Ahead of the meeting, 19/30 economists survey by Bloomberg expected a pause, while 11/30 (including GS) expected a +25bp hike. Financial markets were pricing ~4bp of hikes. The statement noted the Board "took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook."
The forward guidance in the final paragraph maintained a tightening bias, but with a softer tone compared to March's statement. The statement noted the Board expects that “some” further tightening (vs “further tightening” in the March statement) of monetary policy “may well be needed” (vs “will be needed” in March) to ensure that inflation returns to target. The statement also noted the decision to hold rate steady “provides the Board with more time to assess the state of the economy”, “in an environment of considerable uncertainty”. In our view this language keeps the options fairly open for the RBA over the next few months.
On the global front, the RBA noted the recent banking system problems in the US and Switzerland “have resulted in volatility in financial markets and a reassessment of the outlook for global interest rates”, and “These problems are also expected to lead to tighter financial conditions, which would be an additional headwind for the global economy”. However, the RBA noted “The Australian banking system is strong, well capitalised and highly liquid. It is well placed to provide the credit that the economy needs.”
On the domestic economy the language was incrementally more dovish around the household sector, noting that there is further evidence that the combination of higher rates, high inflation and falling house prices is “leading to a substantial slowing in household spending”.
The RBA maintained the language that the labor market “remains very tight” and removed the language “although conditions have eased a little” following the strong February report. On wages, the RBA maintained that “wage growth is still consistent with the inflation target” but with the qualification that “provided that productivity growth picks up” – a hat tip to the current strong growth in nominal unit labor costs.
On inflation the language was a touch more dovish on net, noting that “a range of information, including the monthly CPI indicator suggests that inflation has peaked”. Interestingly the statement removed the sentence “Services price inflation remains high, with strong demand for some services over the summer” – despite little new information on services inflation over the past month – but continued to note that “rents are increasing at the fastest rate in some years” and added that “the prices of utilities are also rising quickly”.
Commenting on the decision, Goldman writes that from its perspective, "while today's decision was always a close call, we viewed the pause as revealing a somewhat more dovish reaction function than we had anticipated, particularly given ongoing upside risks to wages growth and inflation in Australia."
And while there is significant uncertainty around the outlook, Goldman now expects the RBA to remain on hold for several months while it 'assesses' the impact of prior tightening - including the roll-off of many fixed rate mortgages over the June quarter - before raising rates in July (+25bp) and August (+25bp) to a terminal rate of 4.1%. By this time the RBA will have a better read on inflation momentum over the June quarter and the Fair Work Commission's decision on minimum and award wages growth for FY2023/24.
That said, even GS is mindful of the significant uncertainty around the macro outlook, both domestically and globally, and acknowledges that the RBA could remain on hold if downside risks to growth and/or inflation are realised. Alternatively, the RBA could restart hikes as soon as May if the 1Q2023 CPI data (26 April) surprise to the upside.
In response to the pause, Australian stocks rebounded into the green, while the Australian dollar fell 0.9% to 0.6723, below 200-DMA at 0.6750.
Finally, as Bloomberg speculates this morning, with the JOLTS data looming in the US this morning, it "feels like a lower-than-expected result would kindle more serious speculation that the Fed may also be done with its tightening campaign."