Interest rates should remain steady for April: Shadow RBA

29 March 2019

The ANU shadow RBA Board is convinced the cash rate should remain on hold for now, with Australia's economy showing signs of weakness.

The Reserve Bank of Australia (RBA) will meet on Tuesday 2 April to review interest-rate settings, 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 the unemployment rate is relatively low at 4.9 per cent, CPI inflation remains below the RBA's official target band of 2-3 per cent, and consumer and business measures are softening.

"Collectively, the Shadow Board's conviction that the interest rate should be held constant is virtually unchanged," Dr Henckel said.

"The Board is 61 per cent confident that keeping interest rates on hold is the appropriate policy, down one percentage point from the previous month. It now attaches a six per cent probability that a rate cut is appropriate and a 33 per cent probability that a rate rise, to 1.75 per cent or higher, is appropriate."

The Aussie dollar has recently been trading around 71 US cents and our share market remains relatively buoyant, with the S&P/ASX 200 stock index consolidating around the 6,200 mark.

Turning overseas, the outlook for the world economy appears to have weakened.

 "What strength exists in the global economy looks fragile, especially when considering the high private and public outstanding debt, the limited fiscal space and the low level of interest rates," Dr Henckel said.

"The Trump administration's fiscal boost is already fading and there remain doubts whether China can arrest the slowdown in its economy. Germany's Ifo Business Climate Index increased slightly in March, after six successive declines, while the rest of Europe continues to post feeble growth."

Back home, Australia's real estate sector's decline is pausing, according to the Shadow RBA. While house prices continue to fall in the major cities, building permits and the construction PMI have improved slightly.

Looking ahead six months, the probability that the cash rate should remain at 1.5 per cent has dropped seven percentage points, to 27 per cent.

The probability of an interest rate decrease in six months has jumped from 20 per cent to 28 per cent, while the probability attached to a required rate increase has fallen further, to 44 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.

Dr Henckel's full commentary will be available on the CAMA Shadow RBA Board website from Sunday 31 March.