The RBA paused its tightening cycle at today's meeting, electing to hold the cash rate at 3.6% (and the Exchange Settlement rate at 3.5%). After lifting rates to a restrictive setting and with the full effects from 350bps of hikes still in the pipeline, the Board is taking a more cautious outlook as it aims to keep the economy on the narrow path to a soft landing. The expectation that further tightening "will be needed" was softened to "may well be needed", giving the Board additional flexibility to respond to the incoming data.
My preview of today's meeting outlined how the developments over the past month were giving a green light for the Board to pause. Assessing that rates were already at a restrictive level - and recognising that the totality of its earlier hikes was yet to fully impact the economy - the Board signalled a switch to a more data dependent focus at the March meeting.
In his decision statement, Governor Lowe referred to the easing in the monthly CPI data as part of the "range of information" that confirmed to the RBA that inflation had peaked. That assessment takes into account slowing household demand, which the Board attributes to rising rates, cost-of-living pressures and falls in housing prices.
While observing that the labour market remained "very tight", the Board last month downgraded the risk of a wage-price spiral emerging as the pace of wages growth (3.3%) was not assessed to be a constraint to returning inflation to the 2-3% target band. Governor Lowe added today that wage gains would not be inflationary "provided that productivity growth picks up".
Referring to the recent stresses in the banking system offshore, Governor Lowe noted that Australia's banks were in a strong position to support the domestic economy but that global growth faced headwinds due to an expected tightening in financial conditions. In that respect, he acknowledged the repricing that had occured in interest rate expectations.
The statement's concluding paragraph highlighted the decision to pause would allow the Board more time to take stock of developments and determine whether monetary policy is calibrated appropriately. Key to answering the question will be the updated set of economic forecasts RBA staff will prepare for the Board to consider at the May meeting.
