Rate rise the appropriate setting - ANU Shadow RBA

28 September 2018

 Australia's official interest rates should increase in October, with confidence in a future rate rise also increasing, The Australian National University (ANU) RBA Shadow Board has found.

The board of the Reserve Bank of Australia (RBA) will meet on Tuesday 2 October 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 the Australian economy grew 0.9 per cent in the June quarter, above the forecast 0.7 per cent.

"Growth was supported by strong domestic as well as overseas demand; fixed investment, however, remained flat," Dr Henckel said.

"The RBA Shadow Board rules out any likelihood that a reduction in interest rates could be called for. Instead it attaches a 45 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 equals 55 per cent."

CPI inflation remains at 2.1 per cent, and the unemployment rate at 5.3 per cent. The Shadow RBA expects there'll be plenty of interest in the November announcement around wage growth, which could indicate whether the relatively low unemployment rate is generating any inflationary pressure.

"The Aussie dollar, relative to the US dollar, is oscillating within the 71-73 US¢ range. Yields on Australian 10-year government bonds have rebounded to above 2.7 per cent, after marking a recent low of 2.52 per cent. The Australian stock market remains buoyant, with the S&P/ASX 200 stock index currently priced above 6,200," Dr Henckel said.

Overseas, Dr Henckel said the fiscal profligacy in the US is continuing to fuel its economic boom.   

"Another increase in the federal funds rate is expected before the end of the year, possibly two. The US administration has widened the range of tariffs imposed on Chinese and other imports, with the WTO publicly appealing for restraint on the trade war.

"The US boom contrasts with economic news from many other countries, in particular emerging markets, which are experiencing significant slowdowns. This divergence could mean that the US economy's strength is fleeting and it is only a matter of time before the US economy will fall in line with the rest of the world."

Australian consumer confidence and business confidence has softened, according to figures from to the Westpac Melbourne Institute Consumer Sentiment Index and the NAB business confidence index.

Looking ahead and the Shadow Board's assessment has shifted slightly in favour of a rate increase. The probability of the need for a rate hike in six months is 73 per cent, up two per cent from September.

The probability that rates should remain on hold at 1.5 per cent in six months is 23 per cent, while the probability attached to a rate cut fell back to 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