Note from the best macro team in Australia, led by Gareth Aird, the CBA.
March RBA Board Minutes confirm the evolution in the Bank’s policy bias
The March Minutes are the most dovish piece of communication from the Board since the RBA commenced its tightening cycle in May 2022.
The Board shifted to a neutral policy bias in March. And the Minutes today indicate that the Board did not consider the case to raise the cash rate at the March meeting.
Since the RBA commenced its tightening cycle in May 2022 the Minutes have canvased what the Board considered at each policy meeting. More specifically, at each meeting that the Board decided to leave the policy rate unchanged the case to raise the cash rate was also considered. But in the Minutes today it is apparent that the Board did not discuss the case to tighten policy in March.
The Minutes state that, “members agreed that returning inflation to target remained the Board’s highest priority and that it would take some time before they could have sufficient confidence that this would occur within a reasonable timeframe. At the same time, members noted the importance of preserving as many of the gains in the labour market as possible.”
The Board is becoming increasingly confident that the battle to return inflation to target is being won. And as this confidence grows the focus will increasingly turn to the labour market. The Board wants a ‘soft landing’. And that means minimising the increase in the unemployment rate.
The March meeting predates the strong February labour force survey. But as we covered last week the February employment report was at odds with a host of other domestic economic data (see here).
The Minutes today state that, “it was appropriate to characterise the policy outlook as one in which it was difficult to either rule in or out future changes in the cash rate target.” This is a crystal clear neutral bias.
We believe the Board is reluctant to let on that it views the likely next move in the cash rate as a cut. But the RBA’s economic forecasts are based on the assumption that the cash rate remains around its current level of 4.35% until mid‑2024 before declining to around 3¼% by the middle of 2026.
Given the Minutes today note that the economy is, “tracking broadly as (the RBA) expected”, the Board behind closed doors will view the likely next move in the cash rate as down. But it is too early for the Board to shift to an easing bias.
The Minutes reiterated that the Board considers monetary policy to be restrictive: “Overall financial conditions in Australia were considered to have remained restrictive”. The strength of the housing market is no longer feeding into the Board’s assessment of how restrictive monetary policy might be.
Recall that last year the Board noted that, “housing prices were continuing to rise and loan approvals had increased over prior months, both of which might indicate that financial conditions are not especially restrictive”.
The housing market is essentially divorced from domestic economic activity given the huge mismatch between the underlying demand for housing and low growth in the supply of new homes. My colleague Belinda Allen covered the March home price data earlier today (see here).
This morning Assistant Governor Christopher Kent delivered a speech on “the Future System for Monetary Policy Implementation”. The speech was very much about the plumbing underpinning the monetary system and not the stance of monetary policy. As such, we will leave it to our desk strategy team to opine on Dr Kent’s musings.
We remain comfortable with our base case. Our central scenario sees the RBA commence an easing cycle in September 2024 (we have 75bp of rate cuts in our profile in late 2024 and a further 75bp of easing in H1 25, which would take the cash rate to 2.85%).
