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Living in limbo

01 June 2014

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Dr Timo Henckel’s areas of expertise include macroeconomics, international economics, international finance and general economics.

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The Reserve Bank of Australia should leave interest rates unchanged in June despite uncertainty over the economic outlook, the Crawford School-based RBA Shadow Board has found.

“The Australian economy remains in limbo,” said shadow board chair Dr Timo Henckel, from the ANU Centre for Applied Macroeconomic Analysis (CAMA).

“While non-mining businesses appear to have strengthened and the labour market is holding up, consumer confidence has taken a hit after the Coalition government’s first budget a fortnight ago. Furthermore, revisions to US and Chinese GDP growth are giving cause for concern.”

The RBA Shadow Board is a project based that brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on interest rates ahead of monthly RBA Board meetings.

The RBA Board will hold its June policy meeting on Tuesday.

Dr Henckel said the RBA Shadow Board was 76 per cent confident that interest rates should remain steady at 2.5 per cent, up slightly from 74 per cent in May. It placed only a six per cent probability on a rate cut, unchanged from May, while the probability of a rate hike slipped to 18 per cent in June from 20 per cent in May.

In the long term, the probability that the cash rate should remain at 2.5 per cent in six months rose to 49 per cent from 39 per cent in May, while the probability of a rate hike fell to 40 per cent from 48 per cent in May. The probable need for a rate cut fell two points to 14 per cent.

Dr Henckel said the outlook for the US and Chinese economies remained unclear, but the drop in domestic consumer confidence following the May Budget could now be the key indicator to watch in the coming months.

“The biggest change in statistics is the sharp drop in consumer confidence, measured by the WESTPAC consumer sentiment index, following this month’s budget,” he said.

“While the budget’s overall stance was not as contractionary as anticipated, the public and many analysts considered it to be overly regressive. The index fell to 92.9, down nearly seven points from April.

“This fall may turn out to be temporary as the disapproval of the budget subsides. However, it actually continues a downward trend, after the index hit a high of 110.63 in September 2013. As a leading indicator, this is a number to watch closely in the coming months.”

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 and Saul Eslake 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.

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