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Interest rates should remain on hold: Shadow RBA

03 March 2019

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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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The Crawford School-based Shadow RBA Board’s conviction that the cash rate should remain on hold has strengthened since last month, with Australia’s economy currently not showing any clear direction.

The Reserve Bank of Australia (RBA) will meet on Tuesday 5 March to review interest-rate settings, 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 while real wages growth has ticked up marginally, consumer and business indicators paint a mixed picture, and the housing market has extended its slump.

“The Board is 62 per cent confident that keeping interest rates on hold is the appropriate policy, up six percentage points from February,” Dr Henckel said.

“It attaches a 35 per cent probability (41 per cent last month) that a rate rise, to 1.75 per cent or higher, is appropriate - and an unchanged three per cent probability that a rate cut is appropriate.”

The Australian dollar has rebounded after testing the psychologically important floor of 70 US cents, now trading between 71 and 72 US cents.

Yields on Australian 10-year government bonds have continued their fall, to 2.1 per cent. Meanwhile the Australian share market has extended its recent gains, with the S&P/ASX 200 stock index approaching the 6,200 mark.

Looking overseas, numerous international organisations, including the International Monetary Fund and the Organisation for Economic Cooperation and Development, are gently revising their 2019 outlook for the global economy down. This is despite financial markets continuing their New Year rally.

“The risks to the global economy remain much the same,” Dr Henckel said.

“America’s fiscal boost from the Trump administration’s tax cuts will likely wane; Europe’s economies, including Germany’s, are weakening; emerging markets, especially the highly leveraged ones, are susceptible to the shifts in sentiment in financial markets. Furthermore, political instability and geo-strategic tensions do not seem to be abating any time soon.”

Looking ahead six months, the probability attached to a required rate increase has fallen from 60 per cent to 46 per cent, according to the Shadow RBA.

The estimated probability that the cash rate should remain at 1.5 per cent equals 34 per cent, five percentage points up from the previous round. The probability of an interest rate decease has jumped from 11 per cent to 20 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:  12 July 2020/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team