A pause by the RBA is likely but the rate pain isn’t over

Reserve Bank governor Philip Lowe. Picture: Bloomberg

The Reserve Bank looks set to keep interest rates on hold at its policy meeting on Tuesday, but any pause in its nearly year-long campaign of aggressive hikes will be laced with a hawkish reminder that the central bank isn’t finished tapping the policy brakes just yet.

With 350 basis points of hikes delivered since May, the central bank appears set to step to the sidelines to assess the impact of those increases, in the knowledge that lags in the transmission of tighter policy settings can be ­significant.

Monthly consumer price inflation data for January and February sent a message that the peak in inflation was almost certainly reached in the final months of last year, while wage growth figures have yet to signal that a 1970s wage-price spiral is taking place.

All this is happening against a backdrop of tightening credit conditions in the major economies as financial markets await news of the next bonfire in the banking sector, with significant names like Credit Suisse and Silicon Valley Bank already in ashes.

The RBA already set the stage for a pause in the minutes of its March policy meeting, delivering unusually explicit guidance that the option would be considered in April.

“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,” the minutes said.

The RBA added that monetary policy was now restrictive and the “economic outlook was uncertain”.

“The considerations meant it would be appropriate at some point to hold the cash rate steady to assess more fully the effect of interest rate increases to date,” the bank said.

The minutes were consistent with recent comments by RBA governor Philip Lowe saying that he has a “completely open mind” about the outcomes of coming policy meetings.

The central bank has given itself all the wriggle room it requires to deliver a pause without surprising financial markets.

Hawkish guidance will likely be retained next week, with the RBA conscious that it risks falling well below the policy rates now in place in other major economies. The downside of that would be a much weaker Australian dollar.

The Reserve Bank has probably looked deeply into what has been dubbed the “mortgage cliff”, and probably feels confident that the transition of nearly a million households from low fixed-rate mortgages to higher-rate loans will proceed with relatively few problems.

Fixed-rate borrowers appear to have planned for the transition to higher rates, which should smooth the process as it plays out through the year.

Still, it remains on the central bank’s radar because it is still a major risk to consumer spending, with repayments on an average mortgage of about $600,000 set to rise by close to $13,000 a year.

Importantly, a break in the tightening cycle shouldn’t be confused with its completion, and the RBA will probably ram that point home next week.

Further policy tightening is likely, especially if first-quarter inflation data in late April serve up a high surprise.

Reassuringly, a pause in April will signal that the central bank is moving away from the urgent catch-up increases that marked the last year as inflation surged, to a more considered, data-led approach.

In normal times, back when the global economy wasn’t exiting a pandemic and an overdose of economic stimulus, the Reserve Bank increased interest rates incrementally, often with many months separating the decisions.

That should be celebrated after a period of time where the trajectory of the economy was anything but textbook.

Dow Jones Newswires