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Case builds for a rate hike

06 October 2014

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Crawford School’s Centre for Applied Macroeconomic Analysis (CAMA) provides a forum for quality research and discussion of policy issues between academia, government and the private sector.

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The Reserve Bank of Australia (RBA) should leave interest rates unchanged after its October board meeting, although the chances of a rate hike in six to 12 months were increasing, Crawford School’s RBA Shadow Board has found.

The RBA Shadow Board chair Dr Timo Henckel said the recent fall in the Australian dollar against the US dollar should help stimulate the Australian economy.

“This fall should help stimulate and rebalance the domestic economy but the extent is uncertain,” said Dr Henckel from the Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School.

“The CAMA RBA Shadow Board recommends that the cash rate remain at its current level, yet there is growing confidence that it ought to be raised in 6-12 months.”

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

The probability of a rate cut was four per cent, while the probability of a rate hike was up four points in a month to 25 per cent in October.

The RBA Shadow Board is a project based at CAMA. 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 October policy meeting on Tuesday.

In the long term, the probability that the cash rate should remain at 2.5 per cent in six months fell from 49 per cent in September to 38 per cent in October.

The probable need for a rate increase in six months rose to 56 per cent from 42 per cent last month.

The probability of a rate increase a year out was up 10 percentage points to 71 per cent.

Dr Henckel said wage pressures were not a serious concern, even though the July spike in Australia’s unemployment rate has been reversed.

Globally, US growth looks solid although falling inflation expectations might be a sign of future weakness, while China was also showing signs of weakness.

“Uncertainty about Chinese growth and official announcements to aim for more ambitious CO2 emission reductions point to sustained weakness of commodity prices and Australia’s terms of trade,” he said.

“News of Europe’s economies is not good as several Eurozone countries are flirting with recession.

“The military efforts in the Middle East, along with heightened security measures, will likely drag the global economy down.”

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 Crosby did not vote in the October round.

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

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