RBA Drops Rate-Hike Discussion as Risks Seen a Bit ‘More Even’

(Bloomberg) — Australia’s central bank signaled a further shift toward a neutral stance as minutes of its March meeting showed the board didn’t consider the case to raise interest rates for the first time since May 2022.

The Reserve Bank made no mention of rate-hike discussions in the minutes released Tuesday, while noting the balance of risks to the outlook were “a little more even” than previously. The board kept the key rate at a 12-year high of 4.35% and said recent economic data had been broadly in line with its forecasts.

Read more: RBA Didn’t Consider Case to Raise Rates in March, Minutes Show

This is “the most dovish piece of communication from the board since the RBA commenced its tightening cycle,” said Gareth Aird at Commonwealth Bank of Australia, adding that it confirms a neutral bias. “The board is becoming increasingly confident that the battle to return inflation to target is being won.”

The minutes were released shortly after Assistant Governor Christopher Kent announced the RBA will ensure enough liquidity is available to keep the nation’s financial system running smoothly as billions of dollars of bonds it bought during the pandemic fall due. 

The RBA is shifting to an ample reserves system — emulating a similar pivot by the European Central Bank and other institutions, Kent said in a speech at the Bloomberg Australia Briefing in Sydney on Tuesday. He emphasized the change has “no implications” for the RBA’s stance of monetary policy.

Kent did say later that the outlook for interest rates in Australia remains “uncertain” and reiterated the RBA’s position is to not rule anything in or out. He declined to respond to a question on how he would describe the bank’s policy position in one word.

“The key point is that risks are reasonably well balanced,” he said in an interview with Bloomberg Television. “Inflation has come down a long way, it does look to be moderating, but the path according to our forecasts is a gradual moderation from here.”

The central bank, in the March minutes, said that while inflation remains high, it is gradually moving back toward target. The RBA aims to keep CPI between 2-3% and it eased to 4.1% in the fourth quarter of last year.

“Members agreed that returning inflation to target remained the board’s highest priority and that it would take some time before they could have sufficient confidence that this would occur within a reasonable timeframe,” according to the minutes. 

The RBA board meeting was held in a week where central banks from Japan to the US and UK took policy decisions. The Bank of Japan raised rates and scrapped its yield curve program, the Swiss National Bank unexpectedly cut rates, while Federal Reserve chief Jerome Powell charted a steady course.

Kent pointed out to Bloomberg Television that the RBA’s central forecasts for inflation “are predicated on further good things happening, including productivity growth, but there are a lot of uncertainties around that.”

The RBA’s transition to an “ample reserves” system in its financial plumbing reflects a fundamental shift in how central banks implement monetary policy as they try to strike a balance between operating with a smaller balance sheet and reducing their footprint in markets, while avoiding liquidity shortages that may hurt financial stability and impair monetary transmission.

More than A$100 billion ($65 billion) of the Australian central bank’s A$527 billion in assets is set to roll off by the year’s end — as the table below shows. 

When asked how large the RBA’s balance sheet is likely to be under the new system, where lenders will have a greater say on how much cash they need to operate, Kent said it was still uncertain. 

The revamp of the plumping will see banks decide how much liquidity they need. 

“It should transition fairly seamlessly from one of excess to ample and we’ll know we are there when banks start showing up in larger numbers and larger quantities at our operations on a weekly basis,” said Kent, who oversees financial markets at the RBA.

Kenneth Crompton, a senior fixed income strategist in Sydney, said the change should help bolster investor confidence on liquidity. 

“The fruit of this announcement will be greater market confidence that adequate, fixed-price liquidity will be available even as the excess reserves shrink,” he said. 

–With assistance from Garfield Reynolds, Emma Partis, Haidi Lun and Ruth Carson.

(Adds minutes of RBA’s March policy meeting.)

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