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No Cup Day rate change

05 November 2017

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Professor Warwick McKibbin is an ANU Public Policy Fellow at Crawford School. Professor McKibbin was a member of the Board of the Reserve Bank of Australia from 2001- 2011. He teaches Modelling the World Economy: techniques and policy implications (IDEC8127).

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Australia’s official interest rates should remain on hold in November but future rate rises are looking more likely with a strengthening global economy and a favourable outlook for domestic employment, Crawford School’s RBA Shadow Board has found.

The board of the Reserve Bank of Australia (RBA) will meet on Melbourne Cup Day on Tuesday to review official interest rates, which have been at a record low of 1.5 per cent since August 2016.

Chair of the RBA Shadow Board Dr Timo Henckel said Australia’s CPI inflation rate of 1.8 per cent for the year to the end of the September quarter was below the RBA’s official target band of two to three per cent, but the drop was likely to be temporary due to a fall in food prices.

“Favourable employment figures and an improving outlook for the global economy increase the likelihood that interest rates need to rise in the future. For this month the RBA Shadow Board continues to advocate a hold-and-wait policy,” Dr Henckel said.

Dr Henckel said official figures released in October found Australia’s seasonally adjusted unemployment rate fell by another 0.1 percentage points to 5.5 per cent, the lowest jobless rate since May, even though employment went up by a mere 19,800. He said the labour force participation rate held steady at 65.2 per cent.

“No new data on wage growth has been released, a number to be watched closely as it remains surprisingly subdued, given the tightness in the labour market,” he said. Dr Henckel said the global economic expansion continues to build.

“The expansion of the global economy is gathering pace. Global share markets continue on their bull run, raising growing concerns that share and bond prices are trading well above their fundamental values and that a major correction is due,” he said.

“More and more central banks are expected to lift rates, or already have.”

Dr Henckel said the RBA Shadow board attached a 60 per cent probability that that holding rates steady was the appropriate setting for November, unchanged from October.

The confidence attached to a needed rate cut in November fell to two per cent from six per cent in October, while confidence in a needed rate hike was 38 per cent, down from 39 per cent last month.

In the longer term, the probability for a needed rate hike in six months was 70 per cent compared to 73 per cent a month ago.

The probability that rates should remain at 1.5 per cent in six months was 24 per cent (21 per cent in October), while the probable need for rates to fall in six months was unchanged at six per cent.

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.

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

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