Rates to remain steady on Melbourne Cup day: Shadow RBA

3 November 2014

The odds are building against any change in official interest rates on Melbourne Cup day, the Australian National University RBA Shadow Board has found.

The RBA Shadow Board chair Dr Timo Henckel said the recent drop in inflation, and weakness in the global economy, temporarily eases pressure on the Reserve Bank of Australia (RBA) to increase the cash rate from 2.5 per cent.

“The drop in headline inflation to 2.3 per cent reduces the pressure for the RBA to lift the cash rate,” said Dr Henckel from the ANU Centre for Applied Macroeconomic Analysis (CAMA).

“However, the lower inflation rate is largely driven by a fall in electricity prices, following the abolition of the carbon tax in July, and should be interpreted as a once off adjustment to prices as opposed to a sustained fall in inflation.

“Furthermore, continued weakness of the Aussie dollar will add inflationary pressures to the domestic economy in the medium run.”

The RBA Board will hold its November policy meeting on Melbourne Cup day on Tuesday.

The RBA Shadow Board is a project based at 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 interest rates ahead of monthly RBA Board meetings.

Dr Henckel said the RBA Shadow Board attached a 71 per cent probability that the cash rate should remain unchanged in November, while the probability of a rate hike was 23 per cent, down two points from October.

The probability of a rate cut was just six per cent, up two points from October.

In the long term, the probability that the cash rate should remain at 2.5 per cent in six months fell to 37 per cent from 38 per cent in October. The probable need for a rate increase in six months dropped to 54 per cent from 56 per cent a month ago.

The probability of a rate cut in six months was nine per cent compared to seven per cent in October.

Dr Henckel said wages growth remained weak and domestic business indicators have also weakened, while the fiscal outlook remains unclear with elements of the May budget blocked in the Senate.

The global outlook was also worsening.

“Europe, including Germany, looks to slide into recession. China’s economy seems a long way from returning to double-digit growth. The US economy has been mixed but low and falling inflation expectations in the world’s largest economy do not bode well for the future,” he said.

“In spite of the Federal Reserve Bank’s assurance that it will not revive its policy of quantitative easing, US interest rates, and global interest rates, are likely to stay very low for some time. The deterioration of the armed conflicts in Iraq and Syria pose a serious threat to the world economy.”

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; Mardi Dungey of University of Tasmania; and John Romalis, Professor of economics at the University of Sydney.

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