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No need to move on interest rates

29 February 2016

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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) had no need to move official interest rates in March, with an uncertain global outlook and a modest outlook for Australia’s economy, 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 2015 and will meet on Tuesday to review interest-rate settings.

RBA Shadow Board chair Dr Timo Henckel said markets have bounced back from the turmoil at the start of the year, and holding interest rates steady in Australia remained the best policy.

“After last month’s rout, global stock markets bounced back but financial markets remain edgy. Australia’s unemployment rate rose to six per cent and inflation, at 1.7 per cent, remains below the RBA’s target band of two three per cent,” Dr Henckel said.

“Overall, the outlook for the Australian economy is modest. The RBA Shadow Board continues to have a strong preference for keeping the cash rate on hold, attaching a 68 per cent probability to this being the appropriate policy setting.

“The confidence attached to a required rate cut equals 22 per cent, down five percentage points from the previous month, while the confidence in a required rate hike only equals 10 per cent.”

Dr Henckel said the global economic outlook, particularly in emerging markets, looks feeble.

“Global share markets have rebounded a little but volatility and uncertainty, as measured by the VIX, remain high,” he said.

“World trade fell 13.8 per cent in dollar terms in 2015, making it the worst year for global trade since the global financial crisis, according to the Netherlands Bureau of Economic Policy World Trade Monitor. However, much of this decline can be attributed to falling commodity prices; in volume terms the picture looks much less grim.

“While the US economy continues to expand at a modest clip, Europe and the emerging markets are straining. High indebtedness, both private and public, limits the extent to which these economies can fuel demand, even at historically low interest rates. Thus, global growth will likely remain weak, and there may be further disruptions in financial markets.

In the longer term, the Shadow RBA Board placed a 47 per cent probability on the need for rates to increase in six months, down 13 points from a month ago. The probability that rates should remain at 2.0 per cent jumped to 30 per cent from 24 per cent a month ago.

The probability of a needed rate cut in six months was 23 per cent, compared to 16 per cent in February.

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 behavior.

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

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Updated:  29 October 2020/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team