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No pre-Christmas rate hike: Shadow RBA

30 November 2014

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Dr Timo Henckel is a Research Fellow ANU College of Business and Economics. His areas of expertise include macroeconomics, international economics, international finance and general economics.

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The Reserve Bank of Australia (RBA) should not change interest rates ahead of Christmas when it meets for the last time in 2014, Crawford School’s RBA Shadow Board has found.

The RBA’s official cash rate has been set at 2.5 per cent since August 2013.

RBA Shadow Board chair Dr Timo Henckel said Australia’s economic outlook had not changed much since last month and the Shadow Board attached a 70 per cent probability that keeping rates steady in December is the appropriate policy setting.

“Growth remains slightly below trend and inflation well contained within the official target band,” said Dr Henckel, from the Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School.

“Weakening commodity prices, a pickup in domestic production, slowing growth in China and Europe and geopolitical uncertainty suggest the most appropriate action is for interest rates to stay on hold.”

The RBA Board will hold its December policy meeting on Tuesday, with its next meeting not due until February.

The RBA Shadow Board brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behaviour.

Dr Henckel said the RBA Shadow Board attached only a five per cent probability to the need for a rate cut in December, while the probability of a needed rate hike was 25 per cent.

In the long term, the probability that the cash rate should remain at 2.5 per cent in six months fell to 36 per cent from 37 per cent in November. The probable need for a rate increase in six months rose to 56 per cent from 54 per cent a month ago.

The probability of a rate cut in six months remained at nine per cent.

However, the Shadow RBA found a 71 per cent probability that interest rates ought to be higher in a year’s time.

Dr Henckel said at present, sustained weakness in global energy prices will maintain downward pressure on domestic inflation.

“The Australian dollar continues to hover around the 85 US¢ mark, a value many economists consider reflects fundamentals. If domestic interest rates have indeed bottomed out and demand picks up, the Aussie dollar may strengthen a little,” he said.

The global outlook was also similar to a month ago.

“Europe, including Germany, risks a major recession while growth of China’s economy is modest. Better news is coming from the USA; however, with the Republicans taking control of Congress in this month’s midterm elections, President Obama will face fierce opposition, giving little hope for any serious structural reforms,” he said.

“The situation in Eastern Ukraine remains highly unstable and Western efforts to combat ISIS in Iraq and Syria continue to pose serious threats to any recovery of the world economy.

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; Professor Guay Lim of the University of Melbourne; James Morley of University of New South Wales; Jeffrey Sheen of Macquarie University; Mardi Dungey of University of Tasmania; and 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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