Shadow RBA's conviction rates should stay put strengthens

Interest rates should remain at the new record low rate of 1 per cent, according to The Australian National University’s RBA Shadow Board.

The conviction that rates should remain unchanged has strengthened to 71 per cent, up from 68 per cent last month.

The Shadow Board’s vote comes ahead of the Reserve Bank of Australia’s official cash rate announcement on Tuesday.

ANU RBA Shadow Board member Dr Timo Henckel said the board attaches a 14 per cent probability that both a rate cut and a rate rise are appropriate.

“Australia’s inflation rate remains well below the RBA’s official target of 2-3 per cent. The unemployment rate equals 5.2 per cent for the fourth month in row, and real wage growth remains low at 0.7 per cent,” Dr Henckel said.

“This rate of wage growth remains a concern.”

The Aussie dollar has continued its decline relative to the US dollar dipping below 67 US cents, with yields on Australian 10-year Government bonds also extending their decline.

“The dramatic fall in bond yields points to a growing conviction that the economy is likely to weaken in the foreseeable future,” Dr Henckel said.

“Globally, the US-Chinese trade war poses an acute danger to the short-term outlook. The uncertainty surrounding Brexit and a weakening Euro zone are likewise a threat to global economic growth.”

Back home the Shadow Board noted consumer confidence increased 3.6 per cent in the last month.

The Shadow Board says this may reflect a bounce in confidence following the recent interest rate cuts.

“Looking ahead, the estimated probability that the cash rate should remain at 1 per cent in six months’ time is 34 per cent, up 5 per cent,” Dr Henckel said.

“The probability attached to an interest rate decrease stands at 37 per cent, while the probability attached to a required increase equals 28 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.

For media assistance, contact the ANU Media Team on +61 2 6125 7979 or at media@anu.edu.au

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