The Waiting Game Continues

Yet again, there is little news about the domestic and international economies to incite the members of CAMA’s RBA Shadow Board to change their views. The consensus to keep the cash rate at its current level of 2.5% remains strong.

The overarching view is that the interest rate sensitive sectors of the Australian economy, in particular the housing market, are reacting to the historically low cash rate, with signs of the export sector benefiting from an Aussie dollar below parity with the US dollar. At the same time inflation is comfortably within the RBA’s target range, there remains some slack in the labour market and the Aussie dollar is relatively high. On balance the RBA can afford to maintain its accommodative policy in the near term.

The Shadow Board’s confidence in keeping the cash rate steady equals 63% (down from 66% in November). The probability attached to a required rate cut now equals 7% while the probability of a required rate hike equals 30%.

At longer horizons the following picture emerges: 6 months out, the probability that the cash rate should remain at 2.5% is unchanged at 34%. The estimated need for an interest rate increase has edged up to 47% (46% in November), while the need for a decrease has fallen to 18% (20% in October). A year out, the Shadow Board members’ confidence in a required cash rate increase has strengthened to 59% (up from 56% in November); the need for a decrease is now estimated at 21% (down from 23% in November).

The RBA board will not meet in January, nor will the CAMA RBA Shadow Board. Before the next meeting in February 2014 there should be considerably more information about the state of the economy, revealing whether the downside risks remain substantive or whether the Australian economy is exiting the current trough.