4 Apr 2023
The Reserve Bank of Australia (RBA) Board has left the cash rate unchanged at 3.60% at its April meeting.
April 2023 - Article provided by PSK's Chief Investment Officer Chris Lioutas.
Leading into the meeting, we thought there was a 50/50 chance of no rate rise versus another 0.25% increase. An increase would have flagged that they were seriously worried about inflation (and consequently less so about the economy) whilst a no change decision would have suggested they were done raising rates in this cycle, bringing expectations of rate cuts forward.
At this juncture, it’s best for the RBA to keep their policy options open and we feel the statement accompanying the decision achieved that. That is, monetary policy is likely tight enough to see meaningful falls in inflation in the period ahead, but the inflation fight is far from over given it was 7.8% in December 2022 and 6.8% according to the February 2023 monthly indicator.
There were some subtle changes and some re-ordering to their April statement relative to the previous month.
Key points of focus include:
- Reiterated that monetary policy operates with lag but validated that the pause this month as giving them additional time to assess the impact of the increase in rates to date.
- Referenced that the recent banking system problems are expected to lead to tighter financial conditions (ie. banks further constrict lending growth which is akin to more central bank rate rises).
- Made a very clear statement that the Australian banking system is “strong, well-capitalised and highly liquid”, and interestingly emphasised that Australian banks are well placed to provide the credit the economy needs (ie. possibly flagging to the banks that they need to be careful as to how far they constrict lending).
- Comments on inflation were consistent that inflation had peaked but also referenced the price of utilities rising quickly (new dimension).
- Left the door open for further rate rises to ensure inflation returns to target, giving them some policy flexibility if inflation doesn’t continue to fall at an appropriate pace.
We still believe that the RBA is near the end of this hiking cycle given the lagged effect of the cumulative 3.5% of rate increases since May 2022. They continue to balance these lagged effects, which we think will be considerable and evident over the coming months, with maintaining their credibility on the inflation fighting front of bringing inflation down into the 2-3% range over the medium term.
Following their announcement, Australian equities moved higher, the AUD/USD fell, and bond prices rose (ie. yields lower).
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
