Crawford School of Public Policy

Australian interest rates should remain on hold in May ahead of the federal Budget and with ongoing global uncertainty over Donald Trump’s Presidency in the US and North Korea’s weapons testing, Crawford School’s RBA Shadow Board has found.

The board of the Reserve Bank of Australia (RBA) will meet on Tuesday to review official 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 March quarter inflation rose to 2.1 per cent and back within the RBA’s 2-3 per cent target band, while the unemployment rate remains a worrying 5.9 per cent seasonally adjusted.

“Internationally, President Trump’s first 100 days in office continue to raise eyebrows and put policymakers and economists on edge. Domestically, the federal budget takes centre stage,” Dr Henckel said.

“In an attempt to balance all these competing forces, the RBA Shadow Board remains convinced that the cash rate should remain at its current level.”

He said the RBA Shadow board attached a 57 per cent probability that holding rates steady was the appropriate setting, up from 54 per cent in April.

The confidence attached to a needed rate cut was three per cent and unchanged from April, while confidence in a needed rate hike was down to 40 per cent in May from 43 per cent in April.

Dr Henckel said the global uncertainty and the contents of the Budget on 9 May were the biggest issues for the economy.

“International news is dominated by electoral uncertainty and geostrategic posturing. In particular, the sabre-rattling by the leaders of North Korea and US are cause for concern. An intensification of this conflict will likely unsettle global financial markets, with implications for the Australian market also,” he said.

“Domestically, the housing crisis is attracting increasing attention, with the Treasurer acknowledging that the crisis extends not only to mortgagees but also to renters.

“The big unknown is this month’s budget. It will likely include a housing package yet big reforms such as changes to negative gearing and capital gains tax concessions are off the table. The government’s announcement to fast-track last year’s $50 billion infrastructure plan will generate a sizeable fiscal stimulus.”

The RBA Shadow Board said in the longer term, the probability for a needed rate hike in six months was 73 per cent for May compared to 74 per cent in April.

The probability that rates should remain at 1.5 per cent in six months was 23 per cent (20 per cent in April), while the probable need for rates to fall in six months was down two points in the month to four 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.

Dr Henckel’s full commentary is available on the CAMA Shadow RBA Board website at https://cama.crawford.anu.edu.au/rba-shadow-board.