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) has no need for a rate cut on Melbourne Cup Day and should keep official interest rates on hold in November, Crawford School’s RBA Shadow Board has found.
The RBA Board lowered the official cash rate from 2.25 per cent to 2.0 per cent in May. However, Australia’s four major banks have all increased interest rates in the past month due to tougher prudential standards, prompting markets to factor in a 60 per cent chance of another official rate cut as early as this week.
The RBA Board will meet on Tuesday to review official interest-rate settings.
RBA Shadow Board chair Dr Timo Henckel said despite annual inflation running at 1.5 per cent and well below the RBA’s target band of two to three per cent, coupled with a weak global economy and underwhelming domestic growth and employment, the RBA Shadow Board considered the official 2.0 per cent cash rate to be the appropriate setting.
“Economic growth and the unemployment rate continue to underwhelm. The global economy looks weak and financial markets are nervous,” Dr Henckel said.
“The RBA Shadow Board on balance prefers to keep the cash rate on hold, attaching a 65 per cent probability to this being the appropriate policy setting.”
Dr Henckel said the probability of a needed rate cut on Melbourne Cup day was 26 per cent, compared to 14 per cent in October. The probable need for a rate increase was only nine per cent. So while the majority view is to hold rates steady, the balance of risks has shifted down.
The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at Crawford School. 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 behaviour.
Domestically, Dr Henckel said employment fell by 13,900 full time jobs in September, while the participation rate continues to decline. The lower Australian dollar has not improved Australia’s balance of trade, while Australia’s property market appears to be weakening.
The domestic stock market has rebounded from the S&P/ASX200 Index fall below 5000 in September.
“With heightened uncertainty about the Australian and global economic outlook, the stock index may well trade sideways for some time,” Dr Henckel said.
Overseas, the main attention is on the US Federal Reserve and when it will lift rates, as well as China’s outlook for growth.
“This week’s Fed statement sounds more bullish again even though the latest US economic data is not as strong as expected,” Dr Henckel said.
“Europe’s problems are not lessening. The refugee crisis will strain government budgets while the Greek debt crisis is only enjoying a brief hiatus. China’s economy still looks shaky and growth is likely to remain relatively soft.”
In the longer term, the Shadow RBA Board placed a 58 per cent probability on the need for rates to increase in six months, with only a 24 per cent probability on the need for rates to remain at 2.0 per cent. The probability of a needed rate cut in six months was 19 percent.
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.