Rates pause on agenda
Board indicates temporary relief on way
THE Reserve Bank has indicated a pause in interest rate rises may be on the cards next month, however warned that they will continue to do “whatever is necessary” to bring persistently high inflation back into line.
Minutes from the central bank’s March meeting, where the board agreed for the 10th consecutive time to raise interest rates – this time by 25 basis points to 3.6 per cent – have been released.
The board recognised while inflation had probably peaked, the cash rate was likely to be “increased a little further” in order to get inflation back to its 2 per cent to 3 per cent target, which it isn’t predicted to do until mid-2025.
But the board, under Governor Philip Lowe, acknowledged that monetary policy was in “restrictive territory” and, given the uncertainty of the economic outlook, it would become necessary to hold interest rates steady for a period.
A pause in rate rises was not considered at the March meeting but will be on the agenda in April.
“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 said.
The decision came after the national accounts revealed productivity had slowed, and the board said that if that continued “inflation could be more persistent than previously thought”.
“Members noted that monetary policy was in restrictive territory, and that the economic outlook was uncertain,” the minutes said.
“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.”
In making their decision, members discussed the lags in the effect of monetary policy, and what the cumulative impacts of the previous nine increases were – noting the lag complicates the task of assessing the economic outlook.
The board noted that there was still a significant sum of pandemic-induced additional savings.
The board said it was possible that the savings might allow a consistent level of spending – even as real incomes declined. They also conceded it was possible some households had, or soon would have, exhausted their pandemic savings; or may not spend it for several years.
“Members noted that it was not yet possible to determine how these various considerations would balance out,” the minutes said.
“The board remains absolute in its determination to return inflation to target, and will do what is necessary to achieve that outcome.”