The Reserve Bank knows how to send conflicting messages that end up confusing everyone.
Two weeks ago, the message from the April board meeting was yes we thought about it, but didn’t raise and it was a similar tale from Governor Philip Lowe a day later in his National Press Club speech in Canberra.
While the board held the official cash rate at 3.6% after lifting the cash rate from 0.1% over the past year, the message was more pausing is not necessarily stopping.
The focus is of course on inflation which reached a 31-year high of 7.8 % in the December quarter and 8.4% in the month of December, according to the monthly indicator. The rate had eased to 6.8% in the February reading.
“The decision to hold rates steady this month does not imply that interest rate increases are over,” Governor Lowe told the Press Club which was the message agreed to at the board meeting the previous day.
“Indeed, the Board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe. It decided, though, that it was prudent to hold rates steady this month to allow more time to assess the impact of the increases in interest rates to date and the economic outlook.”
And yet when we read the minutes of that meeting, it was a much closer affair.
The discussion was much more substantial – the minutes document the discussion for a rate rise over five long paragraphs, while no change took just two longish paragraphs – with the admonition that the decision should also make clear that future rate rises could happen.
The minutes ended with this point “The Governor noted that his speech to the National Press Club the following day would provide an opportunity to explain these issues in more detail. He would also affirm that the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
He did that two weeks ago, but the impression left was a pause that might continue in May but which was data-dependant.
The tone and the length of the discussion about a rate rise was much more substantial than that and an increase would not have surprised, based on the minutes.
The minutes based the pause on this point: “Members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much more monetary policy would need to be tightened to bring inflation back to target within a reasonable timeframe.”
Certainly we can say that the strong jobs data for March has added pressure for a rate rise at the May 2 meeting, but the inflation data for the March quarter and month of March next Wednesday will be the last piece of the current puzzle.
The minutes helped the Aussie dollar add a little to trade around 67.30 US cents heading into European trading (up from 67 US cents at the time of the minutes release at 11.30am). The ASX 200 lost nearly 22 points over the day but closed five points or so higher than the index reading at 11.30 am, so a small positive.
