Mar 20, 2023
Australia Puts Policy Pause Back on the Table as Economy Slows
(Bloomberg) -- Australia’s central bank will consider pausing its policy tightening cycle next month, given interest-rate settings are already restrictive and the economic outlook is uncertain, minutes of its March meeting showed.
The Reserve Bank delivered its 10th consecutive rate hike two weeks ago to take the cash rate to 3.6% as it judged inflation is still “too high” and the labor market “very tight,” minutes of the March 7 meeting showed Tuesday. Even so, the board returned to the question of standing pat during its discussions.
“Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy,” the minutes showed. ”At what point it will be appropriate to pause will be determined by data and the board’s assessment of the outlook.”
While the minutes are dated given the banking sector stress that has roiled financial markets across the world, they show Australian policymakers were already focused on economic uncertainties ranging from the outlook for household consumption to credit growth.
“The April board meeting is ‘live’,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia. “At this stage it looks like a coin toss as to whether the RBA leaves the policy rate on hold in April.”
Financial market pricing has swung significantly since the banking crisis in the US and Europe, with traders now betting that the global monetary tightening is all but done. For Australia, money markets imply the RBA will stand pat at its April 4 meeting, with a 25-basis point cut now priced in for July.
Australian bonds extended gains after the minutes, sending 10-year yields down as much as six basis points to 3.18%, the lowest level since August.
All eyes will be on a number of major central bank meetings over the coming days, led by the Federal Reserve with its decision likely to influence the RBA’s call next month.
Assistant Governor Chris Kent on Monday sought to alleviate concerns the banking crisis will become systemic, maintaining Australian lenders are “unquestionably strong” with solid balance sheets and capital positions.
Australia has lagged 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 RBA’s tightening bias remained intact however, with monthly inflation and retail sales next week gaining importance.
The RBA’s most aggressive tightening cycle in a generation has created a political problem for Prime Minister Anthony Albanese. He’s trying to persuade a heavily indebted electorate grappling with rising living costs that the pain of higher rates is preferable to dealing with entrenched inflation.
The government will release its budget in May, which is likely to have some targeted cost relief measures, although Treasurer Jim Chalmers has said it will keep a tight leash on fiscal spending to avoid further fueling consumer prices.
--With assistance from Garfield Reynolds.
(Adds economist’s comment, bond market reaction.)
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