ANU Shadow RBA split on need for rate rise

5 June 2018

Following last month's Federal Budget, The Australian National University (ANU) RBA Shadow Board remains split on the appropriate setting for our economy.

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 2016.

Chair of the RBA Shadow Board Dr Timo Henckel said while inflation remains below the RBA's official target, unemployment edged up to 5.6 per cent and economists will be closely watching new data on wages growth, due out later next month.

"The RBA Shadow Board attaches a 51 per cent probability that holding interest rates steady at 1.5 per cent is the appropriate setting, while the confidence in a required rate hike is 49 per cent," Dr Henckel said.

The distribution of the Shadow Board's preferences has barely shifted since last month, when it was 49 per cent confident that keeping interest rates on hold was the appropriate policy.

"The Australian dollar, relative to the US dollar, remains range-bound around 75 US cents," Dr Henckel said.

"Yields on Australian 10-year government bonds have retreated slightly from their recent climb, standing now just below 2.7 per cent. This decline, though only small, may result from the continually low wage growth and inflation remaining just below the official inflation target."

"The expansionary effects of the May budget are largely back-ended, particularly the tax cuts; the immediate effect on aggregate demand is likely to be muted."

Internationally, Dr Henckel believes the risks facing the global economy are mostly of a political nature, with a trade war between the US and its trading partners still a real concern, as well as the geo-political conflicts in the Middle East and North Korea.

"These risks do not weigh significantly on global stock markets, but this can change suddenly. The Federal Reserve Bank in the US is expected to continue its tightening cycle throughout the year, with another two interest rate increases likely on the cards."

In the longer term, the probability of the need for a rate hike in six months is 73 per cent, down from 76 per cent in May.

The probability that rates should remain at 1.5 per cent in six months is 22 per cent, one percentage point up from May, while the probability attached to rates falling is unchanged at four per cent.

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 behaviour.

More information on the board is available on their website: https://cama.crawford.anu.edu.au/rba-shadow-board