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Hold and wait the best policy for rates

04 June 2017

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Timo Henckel is a Lecturer in the Research School of Economics at the ANU College of Business and Economics, and Research Fellow at the Centre for Applied Macroeconomic Analysis (CAMA) in Crawford School of Public Policy, The Australian National University.

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Crawford School’s RBA Shadow Board believes interest rates should follow a hold-and-wait pattern in June, with benign domestic economic indicators and another possible quarter of economic contraction.

The board of the Reserve Bank of Australia (RBA) will meet on Tuesday to review official interest rates, which have been at a record low of 1.5 per cent since August last year.

Chair of the RBA Shadow Board Dr Timo Henckel said the economic outlook had little direction from overseas or from the May Federal Budget, while Australia’s consumer and business confidence remain modest.

“Recent revisions to economic forecasts by leading financial institutions reveal that another quarter of economic contraction, following the September quarter 2016, may be on the cards,” Dr Henckel said.

“Last month’s budget is unlikely to significantly alter the outlook, nor are the developments overseas. The RBA Shadow Board continues to advocate a hold-and-wait policy.”

He said inflation at 2.1 per cent is comfortably within the RBA’s 2-3 per cent target band. But export commodity prices have fallen and mining investment is forecast to fall further.

“Commodity export prices dropped a considerable 6.8 per cent in May; they are now more than 10 per cent below their January peaks,” he said.

“Even though mining investment increased slightly for the first time in nearly three years, it is expected to fall 22 per cent in the year ahead, based on ABS surveys. Non-mining firm investment is expected to increase by 3.7 per cent in the same period.

“Internationally, there exists no stand-out news item to help guide policy. Economic statistics from Europe and the US look favourable but geostrategic conflicts, uncertain elections and unpredictable US policy could change this swiftly.

“China is unlikely to experience another round of double-digit growth rates. On the contrary, there remains the possibility that the debt overhang and structural adjustment will further slow the economy.”

Dr Henckel said the RBA Shadow board attached a 56 per cent probability that that holding rates steady was the appropriate setting, down from 57 per cent in May.

The confidence attached to a needed rate cut was three per cent and unchanged from May, while confidence in a needed rate hike was up to 42 per cent from 40 per cent in May. The RBA Shadow Board said in the longer term, the probability for a needed rate hike in six months was 71 per cent compared to 73 per cent in May.

The probability that rates should remain at 1.5 per cent in six months was 23 per cent, unchanged from May, while the probable need for rates to fall in six months was up two points in the month to six per cent.

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School of Public Policy. It brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behaviour.

The RBA Shadow Board includes Professor Bob Gregory and Professor Warwick McKibbin, who have both served on the RBA Board.

Other members are Paul Bloxham of HSBC, Dr Mark Crosby, Professor Guay Lim of the University of Melbourne, James Morley of University of New South Wales, Jeffrey Sheen of Macquarie University, Professor Mardi Dungey of University of Tasmania and John Romalis, Professor of economics at the University of Sydney.

Dr Crosby did not vote in the June round.

Dr Henckel’s full commentary is available on the CAMA Shadow RBA Board website at

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Updated:  25 May 2024/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team