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Rates to be held steady - RBA Shadow Board

02 March 2014

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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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Weakness in the Australian labour market including rising unemployment has led the RBA Shadow Board to advocate a steady-as-she-goes approach by keeping the cash rate at 2.5 per cent in March.

The RBA Shadow Board – a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School of Public Policy – brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on which way the central bank should jump ahead of Tuesday’s RBA meeting.

Shadow Board Chair Dr Timo Henckel said the eight shadow board members who voted in this round thought the current economic settings were correct and did not currently need changing.

“The Shadow Board is 73 per cent confident that the cash rate should remain steady at 2.5 per cent. The probability attached to a required cash rate cut equals eight per cent, while the probability of a required rate hike has fallen to 19 per cent,” he said.

“The decision reflects the unemployment rate rising to six per cent in January 2014, with underemployment and the median duration of unemployment still worsening. The key question is whether improvements in domestic demand will curb the increase in unemployment and underemployment or whether weakness in the labour market will persist.

“Additionally, inflation has edged up but remains within the 2-3 per cent target range. The Australian dollar has rebounded slightly from its recent lows, and asset markets – particularly housing – remain buoyant, bolstering the concern that it is cheap money, not sound fundamentals that is driving asset prices.”

The CAMA RBA Shadow Board includes Paul Bloxham of HSBC, Dr Mark Crosby, Saul Estlake of Bank of America Merrill Lynch, Adjunct Professor Guay Lim of the University of Melbourne, James Morley of University of New South Wales, Jeffrey Sheen of Macquarie University and Mardi Dungey of University of Tasmania (who did not vote this time around).

The two ANU professors on the shadow board, Bob Gregory and Warwick McKibbin, have both served on the RBA Board.

This month’s RBA Shadow Board consensus of 73 per cent to keep the cash rate at its current level has increased from last month’s 68 per cent.

The probabilities of a rate change six months out remain unchanged at 39 per cent, while the board members’ confidence in a required cash rate increase a year out has fallen to 54 per cent (from 58 per cent in February).

Full results from the Shadow Board’s voting are available at

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