Centre for Applied Macroeconomic Analysis

Crawford School’s RBA Shadow Board’s position on the appropriate setting for our economy remains unchanged since last month.

The board of the Reserve Bank of Australia (RBA) will meet on Tuesday 7 August to review official interest rates, which have been at a record low of 1.5 per cent since August 2016.

With inflation sitting just inside the RBA’s official target band at 2.1 per cent and unemployment remaining steady at 5.4 per cent, the RBA Shadow Board has ruled out a reduction in interest rates.

“The RBA Shadow Board attaches a 49 per cent probability that holding interest rates steady at 1.5 per cent is the appropriate setting, while the confidence in a required rate hike is 51 per cent,” Chair of the Shadow Board Dr Timo Henckel said.

“The Aussie dollar, relative to the US dollar, has been largely moving sideways, within a range of 73-75 US cents.

“Yields on the Australian 10-year government bonds have rebounded from their recent low in early July, most recently equalling 2.73 per cent. The Australian stock market has also consolidated, remaining range bound; the S&O/ASX 200 stock index has been see-sawing between 6,200 and 6,300,” Dr Henckel said.

Internationally, US growth in the second quarter equalled 4.1 per cent, while US unemployment was four per cent, which is below the consensus estimate of the natural rate of unemployment. Dr Henckel believes this suggests that inflationary pressures may be building and lends additional support to the Federal Reserve Bank’s announced strategy of gradually lifting the cash rate.

“Markets are anticipating one or two more quarter-point hikes before December. On the other hand, the US administration’s recent increase in tariffs and the ensuing retaliations are cause for concern, particularly if this tit-for-tat culminates into a full-blown trade war, which will also adversely affect the Australian economy,” Dr Henckel said.

Australian consumer confidence rose from 102 to 106 over the past month, according to the Westpac Melbourne Institute Consumer Sentiment Index, while business confidence barely changed.

In the longer term, the probability of the need for a rate hike in six months is 75 per cent, up two per cent from July.

The probability that rates should remain at 1.5 per cent in six months is 21 per cent, down just one per cent, while the probability attached to rates falling is four per cent.

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

More information on the board is available on their website.