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No need for festive season rate change: Shadow RBA

02 December 2018

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Dr Timo Henckel is a Research Fellow ANU College of Business and Economics. His areas of expertise include macroeconomics, international economics, international finance and general economics.

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Australia’s official interest rates should remain on hold for December, but the likely need for a rate hike in six months is increasing, according to the Crawford School-based Reserve Bank of Australia (RBA) Shadow Board.

The RBA will meet on Tuesday 4 December to review interest-rate settings, which have been at a record low of 1.5 per cent since August 2016.

There are some encouraging signs for Australia’s economic outlook, with the unemployment rate remaining low and wage growth finally ticking up slightly.

However, Chair of the RBA Shadow Board Dr Timo Henckel says this wage growth will need to be sustained in the future to ease household budget constraints.

“The RBA Shadow Board rules out any likelihood that a reduction in interest rates could be called for,” Dr Henckel said.

“It attaches an unchanged 53 per cent probability that holding interest rates steady at 1.5 per cent is the appropriate setting, while the confidence in a required rate hike equals 47 per cent.”

Australia’s growth rate still stands at 0.9 per cent for the June quarter, while CPI inflation fell to 1.9 per cent in the September quarter, just below the Reserve Bank of Australia’s official target band of two to three per cent.

The Aussie dollar has bounced back from the recent lows and is currently trading around 73 US¢.

While global markets have quietened down again, Dr Henckel says uncertainty about the future of the world economy remains high.

“The Chairman of the Federal Reserve in the US, Jerome Powell, signalled a reprieve from further increases in the federal funds rate, at least for the immediate future, which duly fed optimism in global share and bond markets,” Dr Henckel said.

“Powell came under severe criticism by President Trump, who argued there was no need for interest rate increases in the current climate. While there appears to be no imminent threat to Australia’s economy from overseas, this could change swiftly and a careful monitoring of global events, political and economic, is warranted.”

While consumer confidence here in Australia has improved slightly, business confidence has softened and key housing indicators have weakened, sustaining the recent decline in real estate prices across much of the country.

Looking further ahead and the estimated probability that the cash rate should remain at 1.5 per cent in six months is 26 per cent, down slightly from November. The estimated need for a rate decrease is unchanged at six per cent, while the probability attached to a required rate hike has increased from 64 per cent to 68 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.

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

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Updated:  24 March 2017/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team