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Murky outlook for economy - Shadow RBA

31 August 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 (RBA) should leave interest rates unchanged after its September board meeting due to the murky outlook for the economy, the RBA Shadow Board has found.

“The picture of the Australian economy painted by the latest data is murky,” said Shadow RBA Board Chair Dr Timo Henckel, from the ANU Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School.

“The housing market and indicators of sentiment are strengthening but growth remains slightly below trend and the unemployment rate rose to 6.4 per cent in July.

“Relative to the previous month, the RBA Shadow Board has become slightly more cautious in its recommendations for interest rates.”

According to the RBA Shadow Board, the probability that the central bank should leave official interest rates at 2.5 per cent in September was 74 per cent, compared to 71 per cent in August.

The probability of a rate cut was six per cent, while the probability for a rate hike was 21 per cent.

The RBA Shadow Board 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 September policy meeting on Tuesday.

In the long term, the probability that the cash rate should remain at 2.5 per cent in six months was 49 per cent, up two points from August. The probable need for a rate increase was down three points to 42 per cent, while the probable need for a rate cut in six months was up one point to nine per cent.

Dr Henckel said policy makers would be keeping a close watch on unemployment after Australia’s unemployment rate hit a 12-year high of 6.4 per cent in July.

“There is no new inflation data available to guide this month’s policy decision, with headline inflation still hugging the top of the 2-3 per cent target band,” he said.

“Business indicators are looking up, with the NAB Business Confidence, the Manufacturing PMI, the Australian PSI, and the capacity utilisation rate all improving in the last month. GDP growth is estimated to lie just below trend.

“The construction industry is responding positively to the housing boom, picking up some of the economic slack left behind from the slowdown in mining investment but, among the RBA Shadow Board members, concerns about inflated asset prices, particularly house prices in Sydney and Melbourne, remain.”

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; 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, and new member John Romalis, Professor of economics at the University of Sydney.

Dr Henckel’s full commentary will be posted on the CAMA Shadow RBA Board website at https://cama.crawford.anu.edu.au/rba-shadow-board

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