I anticipate the RBA to leave the cash rate on hold at 3.6% at today's meeting (decision due at 2:30PM AEST). Whether or not the Board presses the pause button today, the tightening cycle in Australia is approaching a pivotal juncture. At the March meeting, the Board signalled a shift to a more data dependent outlook and agreed to "reconsider" the case to pause in April. With rates already assessed to be at a restrictive level and the full effects from the earlier hikes still in the pipeline, the signs in last week's CPI data that inflation is past the peak may get a pause over the line today.
In March, the Board hiked rates for the 10th meeting in succession, the cash rate rising from 0.1% to 3.6% over the stretch since May last year. Although indicating that further tightening was still expected, the Board softened its hawkish guidance for "further increases" in rates and placed emphasis on the incoming data to determine the timing and scale of tightening required. The change in tone appeared to be prompted by a softer-than-expected outcome in Q1's Wage Price Index. At 3.3% (year-ended) the Board observed that wages growth was not a constraint to meeting the inflation target and that there was a "lower risk of a cycle in which prices and wages chase one another". At a speech the day after the March meeting, Governor Lowe effectively put a pause back on the table.
Markets are giving a green light for a pause today. Although removed from the recent stresses in the global banking system, the repricing lower in interest rate expectations that has come off the back of this episode has flowed through to Australia. Futures markets price rates to be at their peak for the cycle, while the 3-year government bond yield trades well inside the cash rate at around 3%, reflecting the expectation for rate cuts on the horizon. This pricing was buoyed by the decline in last week's CPI data to 6.8% in February, strongly indicating inflation peaked in Q4. Given the Board's aim to maintain the economy "on an even keel", slowing inflation following the stalling in domestic demand growth in Q4 likely warrants the Board pausing its tightening cycle at today's meeting.
