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Australian interest rates should remain on hold for now but may been to be raised in the longer term, Crawford School’s RBA Shadow Board has found.
The board of the Reserve Bank of Australia (RBA) will hold its second meeting for 2018 on Wednesday 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 a drop in global share prices of nearly 10 per cent raises concerns about an end to the bull-run and increased volatility.
“Domestic CPI inflation at 1.9 per cent remains below the Reserve Bank of Australia’s official target band 2-3 per cent, unemployment stands at 5.5 per cent,” he said.
“The RBA Shadow Board rules out any likelihood that a reduction in interest rates could be called for.”
Dr Henckel said there is a clear shift in the Board’s assessment in favour of higher interest rates, which also reflected in the six-month and 12-month recommendations. “The Aussie dollar, relative to the US dollar, after its recent peak has fallen to around 78 US¢, largely reflecting the US dollar’s weakness as opposed to the Aussie dollar’s strength,” he said.
“The local stock also suffered losses, albeit less than elsewhere, with the S&P/ASX 200 stock index’s dropping below 6000.”
Dr Henckel said continued attention will be directed at the global stock markets. “Losses of nearly 10 per cent from recent peaks and greater volatility raise the spectre of further losses and even a bear market. If this were to occur, corporate and household balance sheets – saddled with historically large debt – would strain and a financial crisis, followed by recession, are a real possibility.”
Since the last round in February 2017, the distribution of the Shadow Board’s policy preferences has strengthened in favour of an interest rate increase.
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.
Bob Gregory and John Romalis did not vote in this round.
Dr Henckel’s full commentary is available on the CAMA Shadow RBA Board website at https://cama.crawford.anu.edu.au/rba-shadow-board