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Economy slow and steady: Shadow RBA

29 June 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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The Reserve Bank of Australia should leave interest rates unchanged in July as the Australian economy continues a slow and steady consolidation, The Australian National University’s RBA Shadow Board has found.

“The Australian economy is continuing down its path of slow and steady consolidation. The labour market is holding up and GDP growth remains solid,” said Shadow Board Chair Dr Timo Henckel, from the ANU Centre for Applied Macroeconomic Analysis (CAMA).

“Consumer confidence, depressed after the government’s May budget, has improved slightly, as have several indicators of business sentiment.”

The RBA Shadow Board is a project based at 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 interest rates ahead of monthly RBA Board meetings.

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

Dr Henckel said the RBA Shadow Board believed there was a 76 per cent probability, unchanged since June, that interest rates ought to remain steady at 2.5 per cent.

The probability that rates should be cut edged down to just four per cent from six per cent in June, while the probability of a rate hike rose two points to 20 per cent from 18 per cent in June.

In the long term, the probability that the cash rate should remain at 2.5 per cent in six months was 47 per cent, while the probable need for a rate hike rose marginally to 41 per cent in July from 40 per cent in June.

The probable need for a rate cut in six months fell two points in the month to 12 per cent.

Dr Henckel said there was no new information about inflation until the release of second quarter inflation data. The Australian dollar is strengthening slightly and asset prices remain high, although there are possible signs that the housing market’s run is slowing.

He said some shadow board members, notably Professor Warwick McKibbin, remain concerned about the distortionary effects on asset prices of prolonged low interest rates.

Dr Henckel said the global economy’s recovery remains shaky. US first quarter GDP growth was weak. European data is mixed, although tensions in the Ukraine appear to be waning which should reduce pressure on energy markets. At the same time, Japan’s economy is improving, while China’s is steadying.

Promising signs for the Australian economy come from the rebound in the AIG’s manufacturing index.

“With a slight improvement in consumer confidence as well as the AIG’s services index, we may just be seeing the fruits of sustained low interest rates,” he said.

“Should these indicators continue to improve over the next few months, the call for a tightening of monetary policy will likely grow louder.”

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.

Mark Crosby did not vote in this round.

Dr Henckel’s full commentary will be posted on the CAMA Shadow RBA Board website.

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