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No need for mid-winter rate change

03 July 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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Australia’s official interest rates should remain on hold in July with the country’s economic outlook mixed and growing concerns over record levels of household debt, Crawford School’s RBA Shadow Board has found.

However, Chair of the RBA Shadow Board Dr Timo Henckel said continued tightening of monetary policy in the United States would make it more likely that Australian interest rates would need to rise in the medium to long term.

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.

“Australia’s economic outlook remains mixed. The unemployment rate unexpectedly fell to 5.5 per cent while headline inflation remains well contained. On the other hand, household debt continues to break new records, raising concerns about a possible housing crash in the major capital cities,” Dr Henckel said.

“The RBA Shadow Board continues to advocate a hold-and-wait policy.”

Dr Henckel said Australian headline inflation at 2.1 per cent was well within the Reserve Bank’s 2–3 per cent target band, the unemployment rate for May fell to 5.5 per cent, while weak wages growth continues to be a concern but with no signs of industries experiencing wages pressure.

Economic growth for the March quarter was 0.3 per cent, for a sluggish annual growth rate of 1.7 per cent.

Internationally, the US lifted its key interest rate for the third time in six months in June, and the Bank for International Settlements (BIS) in Switzerland has cited Australia’s high level of household debt, at 130 per cent, as among the world’s highest.

“The BIS remarked that Australia’s household debt servicing burden is currently more than two percentage points higher than the long-run average,” Dr Henckel said.

“Even without any, or only small, interest rate rises this is due to rise to 4–6 per cent in the foreseeable future, prompting the BIS to warn that a ‘financial cycle bust’ could well trigger the next recession.”

Dr Henckel said the RBA Shadow board attached a 59 per cent probability that that holding rates steady was the appropriate setting, up from 56 per cent in June.

The confidence attached to a needed rate cut was two per cent, down one point from June, while confidence in a needed rate hike was down to 39 per cent from 42 per cent last month.

The RBA Shadow Board said in the longer term, the probability for a needed rate hike in six months was 71 per cent, unchanged from June.

The probability that rates should remain at 1.5 per cent in six months was 23 per cent, while the probable need for rates to fall in six months was six per cent – both unchanged from June.

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School. 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.

Professor Dungey did not vote in the July round.

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

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