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Keep rates on hold despite stronger growth

05 March 2017

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Timo Henckel is a Lecturer in the Research School of Economics at the ANU College of Business and Economics, and Research Fellow at the Centre for Applied Macroeconomic Analysis (CAMA) in Crawford School of Public Policy, The Australian National University.

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Australian interest rates should remain on hold in March despite the stronger than expected growth of the Australian economy, Crawford School’s RBA Shadow Board has found.

The board of the Reserve Bank of Australia (RBA) will meet on Tuesday to review interest rates, which have been at a record low of 1.5 per cent since August last year.

Chair of the RBA Shadow Board Dr Timo Henckel said while a rebound in economic growth in the last three months of 2016 was welcome news for Australia, the global outlook remained uncertain.

“Stronger than expected economic growth provides welcome news to the Australian people. Coupled with a lack of new data on inflation, the unemployment rate hardly moving and no clear direction for the global economy, the RBA Shadow Board believes the cash rate should remain unchanged,” Dr Henckel said.

“The Australian economy expanded 1.1 per cent in the last quarter of 2016, more than the forecast 0.7 per cent and a welcome reversal of the contraction in the previous quarter. This is good news, but it remains to be seen whether strong growth can be maintained throughout the year.”

Dr Henckel said Australian inflation remained at 1.5 per cent and well below the RBA target band of two to three per cent, while the unemployment rate fell slightly from 5.8 per cent to 5.7 percent. He said the labour market continues to be volatile, with a surge in part-time employment and a large drop in full-time employment.

Internationally, Dr Henckel said the Trump Presidency and elections in Europe continued to cause uncertainty.

“The world economy is lacking a clear direction. There still exists uncertainty about the Trump Presidency and about Europe, with key elections in France, Germany and the Netherlands looming later this year,” he said.

“The Asian economies appear to be getting by; however, South America, particularly Brazil, is faring poorly. Relative to the underlying fundamentals, global share markets look overvalued.”

He said the RBA Shadow Board attached a 59 per cent probability that holding rates steady in March was the appropriate policy setting, down from 70 per cent in February.

The confidence attached to a needed rate cut was only four per cent (five per cent in February), while confidence in a needed rate hike was up to 37 per cent for March compared to 25 per cent for February.

In the longer term, the probability for a needed rate hike in six months increased to 68 per cent for March from 67 per cent in February.

The probability that rates should remain at 1.5 per cent in six months was 23 per cent (24 per cent in February), while the probable need for rates to fall in six months was unchanged at nine per cent.

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.

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, Professor Mardi Dungey of University of Tasmania and John Romalis, Professor of economics at the University of Sydney.

Professor Gregory, Professor Dungey and Professor Romalis did not vote in the February 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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Updated:  24 March 2017/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team