The Minutes emphasise a high degree of uncertainty; do not take into account the global banking disruptions; and point to a pause in April.
The Minutes of the Reserve Bank Board meeting on March 7 highlight that unlike recent meetings when several policy options were considered the March meeting only considered the case for 25 basis point increase – the resulting decision.
However the Minutes note that “Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy.”
This decision is despite the Board meeting (March 7) occurring before the Regulators took control of Silicon Valley Bank on March 10.
There is considerable discussion of market pricing in the Minutes. “Market pricing implied a 25 basis point increase in the cash rate at the March meeting and suggested that the cash rate would peak at around 4 ¼ % in the second half of 2023,” – with the market response to the global disruptions to the financial sector this pricing has fallen to below 3.6%; that is no further rate hikes with the possibility of rate cuts.
Similarly on international markets the Minutes refer to, “Market participants’ expectations of the path of policy rates in advanced economies had shifted up since the previous meeting.” Now, market pricing for the FOMC is predicting a series of rate cuts over the course of 2023.
Clearly the Board takes market pricing into account. At the time of the Board meeting market pricing supported the view that, in the case of the RBA, nearly 75 more basis points of tightening were likely to follow the March meeting. Now that pricing has fallen away completely.
The discussion on the outlook for policy as dictated by the data highlights the Board’s current uncertainty.
It makes the strong case for the increase at the March meeting while emphasizing uncertainty going forward.
In assessing the recent softening in the data – national output growth; wages growth; monthly inflation – the Board noted “it would be prudent not to place too much weight on one period’s data” …. But “it was appropriate to take some signal from the consistent pattern across recent data releases.”
There are other examples in the Minutes where the Board highlights its uncertainty through its mixed interpretation of the data: “monetary policy was in restrictive territory and that the economic outlook was uncertain”; “members noted that it was not yet possible to determine how these various considerations would balance out.”
But the key point remains clear, “core inflation remains too high ….. the staff’s most recent forecasts were for inflation to return to the 2-3% target only by mid–2025.”
We expect that the case for a pause in April is supported in these Minutes – particularly given the unusual commitment to consider a pause and subsequent developments in market pricing and global financial markets.
However, the overriding challenge of returning inflation to the target will remain the dominant theme at the May meeting when, we expect, the Board will be confronted with a refreshed set of forecasts (benefitting from the March quarter Inflation Report), which will still highlight that inflation will not be at target until mid-2025 – requiring a final 25 basis point increase.
Conclusion
Westpac has been forecasting a pause at the April meeting – the strong emphasis on uncertainty in the March Minutes; the unusual commitment to consider a pause in April; and developments in market pricing and global financial markets all support that view.
But the Minutes continue to make a strong case for the need to reign in the “too high” inflation. This challenge is likely to be just as apparent at the May meeting, when much more information will be available on the inflation challenge, requiring a “final” 25 basis point tightening.
