RBA Board minutes suggest pause may be extended

RBA Board minutes suggest pause may be extended

Click here for the full Note and disclosures.

The Reserve Bank today released the minutes of the February Board meeting at which members left the cash rate steady at 3.75%. That decision two weeks ago, which the minutes today described as “finely-balanced” (as was the case in December, when the RBA did hike) came as a shock to us and other market economists; we had expected another 25bp rate hike.

The main message today is that the RBA is in no rush to hike again. Further hikes are coming, that remains clear, but the risk now is that the pause the RBA has embarked on could longer than we currently expect. We are sticking with our call for the next hike to come in April but, on today’s evidence, the next hike even could come as late as mid-year.

The tone of the commentary announcing the “on hold” decision on February 2 was unexpectedly upbeat - it would have sat comfortably with an announcement of another hike. Today’s “commentary” is noticeably more balanced. As expected, the minutes reveal that officials left the cash rate unchanged two weeks ago because evidence on how the economy (and, in particular, households) was handling the earlier rate hikes was “mixed”. Officials wanted more time to assess how, and at what speed, the earlier rates hikes were feeding through to the domestic economy. The level of uncertainty is unusually high because the Aussie banks have out-hiked the RBA.

The main surprise today in the detail of why the RBA paused is that, in addition to wanting more time to assess the impact of the rate hikes, the pause allows officials to see how conditions evolve offshore. According to the minutes, recent developments in Greece received more attention at the Board meeting than we thought at the time. And, the news regarding Europe’s sovereign issues since the February Board meeting generally has been worse, not better. It is becoming increasingly clear now that some of the main issues on which RBA officials want more clarity, including the offshore sovereign issues, will take some time to resolve.

With little consumer-related data scheduled for release in coming weeks, by the time of the March Board meeting, RBA officials are likely to be at least as uncertain about how households are coping with higher interest rates as there were in February. Since the February Board meeting, the domestic data has been a mixed bag. There have been reported falls in retail sales, home loans, and consumer confidence in the last two weeks, but there also was a scarcely-believable 53,000 bounce in employment for January. Anyway, the apparent boom in employment here jars with other anecdotal evidence that small and medium businesses are not hiring or investing (today’s NAB business confidence report showed a fall in the employment measure).

The complication now is that, having paused, how does the RBA restart the tightening cycle? Clearly, an extended run of strong domestic economic data is not enough to deliver a hike – we had all of that heading into the February decision, yet the RBA stayed on hold. The problem will be that, the economic indicators having been so firm (until very recently), there is a decent chance that the data will soften in coming weeks. Similarly, the upcoming North American data, in particular, will be distorted by the recent snow storms, which will make interpretation difficult.

That said, the minutes make clear that the RBA has paused on the way to a significantly higher cash rate; it has not stopped the tightening cycle. Indeed, we still expect the cash rate to be 5% at the end of 2010, but with slightly more of the tightening now likely to come in the second half of the year. Previously, we had expected a more even spread of rates hikes.

The minutes do not reveal whether the Board decision differed from the official recommendation to Board members. That is, was a recommendation for a hike overruled by a nervous Board? It seems we will never know, although this would have been unusual. Also, it would imply that Board members were spooked by the unfolding events in Europe, or even China. This never is a good look for a central bank. In the absence of evidence to the contrary, it seems Board members accepted the official recommendation to pause.

ENDS

© Scoop Media