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No Melbourne Cup Day rate hike required: Shadow RBA

05 November 2018

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Dr Timo Henckel is a Research Fellow ANU College of Business and Economics. His areas of expertise include macroeconomics, international economics, international finance and general economics.

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Australia’s official interest rates should remain on hold in November, Crawford School’s Reserve Bank of Australia (RBA) Shadow Board has found.

The RBA will meet on Tuesday 6 November to review interest-rate settings, which have been at a record low of 1.5 per cent since August 2016.

Chair of the RBA Shadow Board Dr Timo Henckel said with the country’s growth rate still standing at 0.9 per cent and unemployment down just slightly, there was no need for immediate action on rates.

“The RBA Shadow Board has ruled out any likelihood that a reduction in interest rates could be called for,” Dr Henckel said.

“It is 53 per cent confident that keeping interest rates on hold at 1.5 per cent is the appropriate setting, (up eight per cent since last month), while the confidence attached to a required rate hike was 47 per cent.”

According to the Australian Bureau of Statistics, the unemployment rate in Australia fell by 0.3 per cent in the past month, to five per cent. However, net employment increased by a mere 5,600, suggesting it was the significant reduction in the labour force participation rate (from 65.7 per cent to 65.4 per cent) that was responsible for generating the drop in unemployment.

“New data on real wage growth, which has been worryingly subdued for several years now and is thus closely watched by economists, will not be released until the middle of November,” Dr Henckel said.

Internationally, there appears to be growing uncertainty about the health of the world economy, reflected in recent declines in stock markets worldwide, bond rallies and significant jumps in volatility measures like the VIX.

“This uncertainty is both political in nature, capturing the trade tensions between the US and its trading partners, in particular China, as well as economic, with growing concerns the unprecedented levels of private and public debt may lead to a painful deleveraging phase,” Dr Henckel said.

“While the US and a few other countries, like Germany, are showing signs of strength, at least temporarily, elsewhere economies are looking weaker. Several Latin American countries are experiencing balance of payment crises and political upheaval that may intensify and destabilise the region.”

The US Federal Reserve is expected to announce a further increase in the federal funds rate before the end of the year.

In the longer term, the Shadow RBA Board placed a 64 per cent probability on the need for rates to increase in six months, down from 73 per cent in October.

The probability that rates should remain at 1.5 per cent in six months was 30 per cent, up seven per cent from last month. The estimated need for rates to fall in six months rose to six per cent from four per cent in October.

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.

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

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Updated:  31 August 2017/Responsible Officer:  Crawford Engagement/Page Contact:  CAMA admin