Shadow RBA says record low rates should stay put

5 August 2019

The Australian National University's RBA Shadow Board is strongly convinced official interest rates should remain at the record low of 1 per cent set last month.

Ahead of the Reserve Bank of Australia's official cash rate announcement on Tuesday, the RBA Shadow Board is 68 per cent confident the overnight interest rate should remain unchanged.

The Shadow Board attaches a 22 per cent probability that a required rate hike to 1.25 per cent or higher is appropriate. The Board attaches an 11 per cent probability that a further rate cut, to 0.75 per cent, is appropriate

ANU RBA Shadow Board member Dr Timo Henckel said wage growth was a major challenge for the Australian economy.

"New data on the wage price index will not be released until mid-August, but it is expected to remain unchanged at 2.3 per cent year-on-year," Dr Henckel said.

"With the inflation rate having edged up to 1.6 per cent, this would constitute real wage growth of 0.7 per cent.

"Feeble real wage growth, which prevents a significant increase in household consumption expenditure, remains a genuine concern for Australian policymakers."

Dr Henckel also noted the Australian dollar, which now sits at around US 68 cents, was weakening.

"The Aussie dollar has weakened again relative to the US dollar. At the same time, yields on Australian 10-year government bonds have also continued their decline, down to 1.09%," Dr Henckel said.

"These persistently low yields suggest markets share the RBA's concern about Australia's economic prospects."

Added to these challenges, the Shadow Board notes a significant drop in business confidence and ongoing threats from the global economy.

"The NAB business confidence index, has retreated back to two, after it spiked up to seven in June following the federal election, and well below the long-run average of six," Dr Henckel said.

"At the same time, global interest rates are falling, reflecting economic weakness and attempts by central banks, including the US Federal Reserve, to stimulate spending.

"How effective these interest rate cuts in such a low-interest environment are, is questionable. Moreover, it risks fuelling household and government debt worldwide."

Six to 12-month forecast
Looking forward six months, the RBA Shadow Board attaches a 29 per cent probability the official cash rate should remain at 1 per cent.

The appropriateness for an interest rate cut in the same period stands at 33 per cent, while the probability attached to a required increase equals 38 per cent.

The numbers for a year out point to a rate increase being even more appropriate.

Confidence a cash rate should be held steady in 12 months equals 19 per cent, while confidence in a required cash rate decrease equals 26 per cent. A required cash rate increase in 12 months sits at 55 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.