The RBA strongly signals a pause in April

The RBA will consider pausing in raising rates at its April board meeting.
Kieran Davies

Coolabah Capital

1. The RBA seems likely to pause in raising interest rates next month

Unlike the December board meeting, where the policy choice was between a pause, a 25bp rate hike, and a 50bp rate hike, and the February meeting, where the choice narrowed to either a 25bp or 50 rate hike, today’s RBA board minutes did not reveal the choice presented at the March policy meeting. 

However, the minutes did disclose that the board would consider pausing in April given “most important data released over the prior month – covering GDP, the labour market, wages and inflation – had all been a little softer than expected”, and where subsequent global market volatility is likely to reinforce the case for holding steady for at least a month. That is, the minutes noted: 

“Members noted that it was not yet possible to determine how these various considerations [about policy and the economy] would balance out. They agreed that upcoming releases on employment, inflation, retail trade and business surveys would provide important additional  information, as would developments in the global economy. 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. At what point it will be appropriate to pause will be determined by the data and the Board’s assessment of the outlook.” 

At the same time, the RBA dropped the reference from the February minutes that, “members agreed that further increases in interest rates are likely to be needed over the months ahead to ensure that inflation returns to target and that the current period of high inflation is only temporary”

2. Recent global financial instability should reinforce the RBA’s existing preference to pause in raising interest rates, where cuts are possible if the instability morphs into a global financial crisis.

Recent global market volatility poses some downside risk to the economic outlook for Australia via the potential impact on world growth, bank funding costs, confidence, stock prices and the lending practices of the local subsidiaries of global banks, where the RBA has an informational advantage over the market via its access to APRA’s confidential survey of bank lending standards. 

The exact effect is hard to quantify and would be partly offset by a lower exchange rate, although the market has factored in a substantial impact as it now prices in rate cuts on the implicit assumption that further financial instability evolves into a world financial crisis. 

The abrupt switch in market pricing from rate hikes to rate cuts seems an overreaction at this stage, particularly when central banks have developed a larger policy toolkit in the wake of the global financial crisis and with an immediate and aggressive policy response to the financial volatility to date. 

That said, history has shown that the RBA, like the Fed, has responded to financial crises by cutting rates, where cuts were not long followed by rate hikes in the 1987 and 1998 episodes of global instability given the economic fall-out was limited, and where cuts proved more lasting in the 1990-92 episode of local bank/non-bank failures and in the 2007-09 global financial crisis, given those instances involved significantly higher unemployment and lower underlying inflation.

3. The RBA review panel provides its recommendations to the treasurer on 31 March.

Although not mentioned in today's minutes, the RBA review panel provides its recommendations to the treasurer on 31 March, which the advice should come as no surprise to him given he has said that he is in close contact with the panel. 

The treasurer has said that he will provide the government’s initial response to the recommendations by the mid-May budget. 

The government will also decide whether to reappoint Governor Lowe around the middle of the year, when it seems likely that the treasurer will actively search for his replacement, with panel chair and former Bank of Canada Senior Deputy Governor Wilkins an obvious candidate. 

Separately, note that Governor Lowe is talking at the National Press Club the day after the 4 April policy decision, where past speeches to the press club have focused on the outlook for the year ahead.  

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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