Will the RBA pause interest rates on Tuesday 4 April 2023?…It will be a close call. 

The question is, has the RBA done enough? 

Based on January and February’s monthly inflation data, it would seem so. Inflation appears to have rolled over and seems to be decelerating. Add to this the looming fixed-rate loan-cliff, weak retail sales, record low consumer sentiment and sharply lower housing credit. Even business confidence, a brightish light up until recently, has now slipped into negative territory. 

Unemployment still at record lows

The one key data statistic that confounds this is unemployment at 3.5%. It continues to hover around historical lows. However, the large influx of migrants and students should increase competition for available jobs over time and eventually push unemployment higher.

RBA at a cross roads

Given the RBA governor’s past communication blunders including the infamous pronouncement to not raise interest rates until 2024, he has to tread very carefully in what he says and does.

The RBA will be asking themselves, ‘If we pause rates, will the current level of interest rates continue to crimp demand enough to see inflation retreat back towards our key target of 2%-3% over the next couple of years?’

The last thing the RBA wants to do is mess with the public’s expectations by potentially pausing one month and raising again the next. When the RBA pauses they need to be reasonably confident that that is it, for a while at least. 

Ideally I think the RBA would have preferred to take out a little extra-inflation insurance by raising 0.25% again on 4April 2023. This would allow them a little more time to gauge the more reliable quarterly inflation figures late in April. However given the significant household pain that is already being felt, a pause seems the right thing to do.

Don’t expect the RBA to cut interest rates any time soon. Remember the RBA’s number 1 fight is inflation. I think they will manage inflation lower by keeping official interest rates on hold for some time to come and hope that inflation cascades lower as the economy retreats. The RBA will cut rates only when it is confident that inflation is under control and following a glide path to their ultimate goal of 2%-3%. 

I don’t think the overseas banking collapses will play any real part in the RBA’s April interest rate decision as our banks are too well capitalised and regulated. 

Lending conditions to become more complicated

However, banks (including Australian Banks) are becoming more decerning with how they dish out credit, especially commercial credit—I am already witnessing this now.

Interestingly the Swiss National Bank still raised interest rates by 0.25% this month even after the collapse of Swiss Bank, since taken over by UBS. The USA Federal Reserve likely toned down their interest rate rise this month to 0.25% instead of 0.50% because of turbulence surrounding the Silicon Valley Bank collapse. Scarily inflation in the UK hit 10.4% and they also raised by 0.25% to be at 4.25%. Fortunately, Australia’s inflation problem for now appears more contained.

The RBA has stated many times that returning inflation to 2-3% while keeping the economy on an even keel is a narrow path with risks in all directions. For now, pausing and seeing what happens seems like a reasonable step. 

But it will be a close call indeed.

Let’s see!