Shadow RBA in favour of rate cut

3 June 2019

The Australian National University's RBA Shadow Board has voted in favour of a rate cut for the first time in five years.

The Reserve Bank of Australia will meet on Tuesday 4 June to review interest-rate settings, which have been at a record low of 1.5 per cent since August 2016.

Dr Timo Henckel said the confidence in a required rate cut is now 50 per cent, up from 38 per cent from last month.

"In addition, the Board is 43 per cent confident that keeping interest rates on hold is the appropriate policy, down 11 percentage points from May," Dr Henckel said.

"The Board attaches only an 8 per cent probability that a rate hike, to 1.75 per cent or higher, is appropriate."

The RBA Shadow Board notes the unemployment rate rose for the second month in a row in April, to 5.2 per cent.

It also notes growing concern among economists that Australia's relatively high part-time employment rate reflects significant under-employment.

According to the Board, this helps explain why our low unemployment rates over the past couple of years haven't led to a surge in inflation.

"The yield on Australian 10-year bonds slumped to 1.48 per cent in May, the lowest level on record," Dr Henckel added.

"This reflects doubt about the future health of the domestic economy."

The Federal Election result means the Opposition's proposed tax reform, including the abolition of negative gearing and a revision of the franking credits system, is off the table.

"Instead, the newly elected Government will look to pass its proposed tax cuts," Dr Henckel said.

"Initially, these will benefit lower income households, which, combined with announced infrastructure spending, might provide a small and brief fiscal stimulus.

"Down the track however, the tax cuts favour high-income households who tend to spend less, suggesting the fiscal boost from the tax cuts will be small."

Overseas, the RBA Shadow Board believes the escalating trade war between the US and China poses a threat to both the global and Australian economy.

"Not only will this likely affect trade flows, but it will eventually affect capital markets and possibly increase global risk premiums," Dr Henckel said.

Looking at the longer-term probabilities for the next six months, the RBA Shadow Board's confidence that the cash rate should remain at 1.5 per cent has dropped from 38 per cent to 31 per cent.

The probability of an interest rate cut in that time has increased from 38 per cent to 51 per cent, while the probability attached to a rate hike has fallen further, to 19 per cent.

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) 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.

Dr Henckel's full commentary is available on the CAMA RBA Shadow Board website.