Australia puts policy pause back on the table as economy slows

AUSTRALIA’S central bank will consider pausing its policy tightening cycle next month, given interest-rate settings are already restrictive and the economic outlook is uncertain, minutes of its March meeting showed.

The Reserve Bank of Australia (RBA) delivered its 10th consecutive rate hike two weeks ago to take the cash rate to 3.6 per cent as it judged inflation is still “too high” and the labour market “very tight”, minutes of the Mar 7 meeting showed on Tuesday (Mar 21). Even so, the board returned to the question of standing pat during its discussions.

“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 data and the board’s assessment of the outlook.”

While the minutes are dated given the banking sector stress that has roiled financial markets across the world, they show Australian policymakers were already focused on economic uncertainties ranging from the outlook for household consumption to credit growth.

“Members noted that monetary policy was in restrictive territory and that the economic outlook was uncertain,” the minutes showed. “The outlook for consumption remained a key source of uncertainty.” They also discussed the “significant financial pressures” that some households are experiencing.

Financial market pricing has swung significantly since the banking crisis in the US and Europe, with traders now betting that the global monetary tightening is all but done. For Australia, money markets imply the RBA will stand pat at its Apr 4 meeting, with a 25-basis point cut now priced in for July.

All eyes will be on a number of major central bank meetings over the coming days, led by the Federal Reserve with its decision likely to influence the RBA’s call next month.

Assistant governor Chris Kent on Monday sought to alleviate concerns the banking crisis will become systemic, maintaining Australian lenders are “unquestionably strong” with solid balance sheets and capital positions.

Australia has lagged international peers in the scale of its rate increases, reflecting governor Philip Lowe’s efforts to bring the economy in for a soft landing. The minutes showed the RBA’s tightening bias remained intact, however with monthly inflation and retail sales next week gaining importance.

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The RBA’s most aggressive tightening cycle in a generation has created a political problem for Prime Minister Anthony Albanese. He’s trying to persuade a heavily indebted electorate grappling with rising living costs that the pain of higher rates is preferable to dealing with entrenched inflation.

The government will release its budget in May, which is likely to have some targeted cost relief measures, although Treasurer Jim Chalmers has said it will keep a tight leash on fiscal spending to avoid further fuelling consumer prices. BLOOMBERG