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No need for rate change

02 August 2015

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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 (RBA) should hold interest rates steady in August against a backdrop of easing concerns over a Greek debt default and a continued fall in China’s stock market, Crawford School’s RBA Shadow Board has found.

The RBA lowered the official cash rate from 2.25 per cent to 2.0 per cent in May. The RBA Board will meet on Tuesday to review interest-rate settings.

RBA Shadow Board chair Dr Timo Henckel said the RBA had little new domestic economic data to guide its August policy meeting.

“While official inflation came in at 1.5 per cent for the June quarter, well below the RBA’s target band of two to three per cent, the RBA Shadow Board on balance prefers to hold firm on interest rates,” Dr Henckel said.

“Overseas, debt default and Greek exit from the Euro have been averted at the eleventh hour, while the Chinese stock market experienced a major correction from its lofty heights.

“The uncertainties surrounding the Chinese economy pose the biggest immediate threat to Australia’s export markets and thus to Australia’s GDP.”

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (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 the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behavior.

Dr Henckel said the Shadow RBA Board attached a 68 per cent probability that 2.0 per cent should be the appropriate setting for the cash rate, up from 57 per cent in July.

The Shadow RBA Board found only six per cent probability of the need for a further rate cut, down two points in the month, while the probability of a needed rate increase was 25 per cent compared to 35 per cent a month ago.

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 is available on the CAMA Shadow RBA Board website at https://cama.crawford.anu.edu.au/rba-shadow-board.

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