COVID-19

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Cash rate should stay at historic low as Australia heads for COVID-19 recession

06 April 2020

The extraordinary events surrounding the COVID-19 pandemic are certain to push Australia into recession for the first time in 28 years, according to the Reserve Bank of Australia (RBA) Shadow Board, based at ANU Crawford School of Public Policy.

The Shadow Board is 94 per cent confident that keeping the cash rate on hold is the right policy. The Board’s conviction that a rate cut is needed is 6 per cent, while its confidence in a rate hike is 0 per cent

“Many standard economic indicators are not a good guide in a fast moving crisis,” said Shadow Board member Dr Timo Henckel.

“For example, while the latest official Australian Bureau of Statistics (ABS) figures show an unemployment rate in Australia of 5.1 per cent, this may well double within a couple of months due to the COVID-19 crisis.

“It is unclear to what extent the Government’s Job Seeker program will help workers remain attached to their employers.”

Global financial markets have displayed unprecedented levels of volatility, with stock markets in particular taking massive hits.

“The outlook for the global economy is entirely dominated by the COVID-19 pandemic,” Dr Henckel said.

“The policy responses to control the epidemic are widely expected to lead to a global recession, although there’s disagreement about how deep and enduring it will be.”

Back home, Dr Henckel says efforts by the government and RBA to stem the economic downturn are “unprecedented” and the swiftness with which they’re being implemented makes it difficult to forecast their likely impact.

“Looking ahead six months, the Shadow Board’s vote in favour of keeping the cash rate steady at 0.25 per cent is still very high – 88 per cent,” Dr Henckel said.

“The probability attached to both a rate cut and rate hike is 6 per cent.”

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at the ANU Crawford School of Public Policy. 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’s full commentary will be available online.

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Updated:  7 July 2020/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team