Reserve Bank puts interest rate pause on its April agenda

Home buyers could be in for a financial reprieve ahead of Easter, with the Reserve Bank saying it will consider a pause in interest rate increases at its April meeting.

Minutes of the bank’s March meeting, released on Tuesday, show RBA board members noting a number of conflicting signals about the strength of the economy and the pressures underpinning high inflation in the country.

Financial markets, which until recently had expected the bank to take the official cash rate to 4.1 per cent by the middle of this year, now believe the bank will have to hold rates because of the issues playing out in the American and European banking systems, and may even have to start cutting by the end of the year.

The RBA has lifted the cash rate at its past 10 consecutive meetings, from 0.1 per cent in early May to an 11-year high of 3.6 per cent. On a $604,000 mortgage, the increases have lifted monthly repayments by more than $1100.

The minutes of the March meeting, held before America’s Silicon Valley Bank collapsed and Europe’s Credit Suisse was hit by client outflows and a stock rout, show the concern about the impact of such a rapid tightening of monetary policy.

“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 showed.

“At what point it will be appropriate to pause will be determined by the data and the board’s assessment of the outlook.”

The bank is forecasting inflation, which hit a 32-year high of 7.8 per cent in December, to gradually fall back to 2.5 per cent by the middle of 2025.

That forecast is predicated on further increases in interest rates.

The minutes show the bank is concerned about the level of productivity growth across the economy, noting productivity had not increased during the COVID-19 pandemic period.

This lack of productivity meant inflation could remain higher for longer.

But the minutes also show growing concern about how the economy will perform under the weight of higher interest rates.

“Members noted that monetary policy was in restrictive territory and that the economic outlook was uncertain. These considerations meant that it would be appropriate at some point to hold the cash rate steady, to assess more fully the effect of the interest rate increases to date,” the minutes showed.

As part of their deliberations, members discussed the lags in the effect of monetary policy and the cumulative impact of the significant increase in interest rates since May last year.

They noted that these lags complicated the task of assessing the outlook for the economy.

One key source of uncertainty for the bank is household consumption. While inflation was pushing up the prices for retail goods, the actual quantity of goods sold was barely growing.

“Consumption growth had slowed significantly, as real incomes fell because of high inflation, rising tax receipts and increased interest payments, and as housing prices declined,” the minutes showed.

“The staff’s most recent forecasts assumed that consumption growth would remain subdued for some time, but it was possible that growth could slow by more than expected given very low levels of consumer confidence.”

The minutes show the bank believes upcoming retail trade figures, due next week, employment, inflation and key private business surveys will all play an important role in its April meeting deliberations.

The RBA board next meets on April 4.