Keep cash rate steady amid coronavirus concerns

2 March 2020

The official cash rate should remain at 0.75 per cent in the face of global concerns and market slumps caused by Covid-19, says The Australian National University's Shadow RBA.

But fears of a pandemic meant the ANU RBA Shadow Board's confidence in keeping rates unchanged has weakened.

Voting ahead of Tuesday's official cash rate announcement, the ANU RBA Shadow Board's conviction rates should remain at the historically low level of 0.75 per cent equals 49 per cent. This is down from 70 per cent in February.

The Shadow Board's confidence rates should be cut is 46 per cent, with confidence in a rate hike sitting at just 6 per cent.

The Shadow RBA noted weak wage growth and persistently low inflation were also strong reasons for rates remaining unchanged.

"Fear about a global coronavirus pandemic are already taking their toll on world financial markets and are likely to impose significant economic costs on the Australian economy, should the crisis worsen," said RBA Shadow Board chair Dr Timo Henckel.

"Tepid wage growth, a slight increase in the unemployment rate and an inflation rate that remains below the Reserve Bank of Australia's official target range of 2-3 per cent all point to economic weakness.

"And according to the latest quarterly data, a key variable for gauging inflationary pressures as well as the outlook for consumption expenditure, real wage growth remains worryingly low, at 0.4 per cent year-on-year."

The Shadow Board said the most worrying concern for the global economy was the Covid-19 crisis - which was adding to an already weak outlook.

"The fear surrounding this crisis has clearly battered financial markets worldwide although the likely cost to the Australian economy remains highly uncertain," Dr Henckel said.

The ongoing situation also means the Budget will be left more red than black, with the Shadow Board noting the Government has repeatedly stepped back from its earlier commitment to deliver a surplus this year.

"But even with fiscal policy less restrictive than planned, it may not be sufficiently expansionary to prevent the Australian economy from slowing down," Dr Henckel said.

Looking ahead six months the RBA Shadow Board attaches a 35 per cent probability cash rates should remain untouched. It attaches a 46 per cent probability that a rate cut to 0.5 per cent is appropriate and only a 6 per cent probability of a rate rise to 1 per cent or higher.

Twelve months out the RBA Shadow Board says it is only 29 per cent certain cash rates should remain steady. The confidence in a required decrease is 51 per cent, while confidence in a hike equals 19 per cent.

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy.

The Board 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.

Read the RBA Shadow Board's March 2020 commentary here