Centre for Applied Macroeconomic Analysis

Australia’s cash rate should remain at the new record low of 1 per cent for now, according to Crawford School’s RBA Shadow Board.

However, the Shadow Board’s conviction that rates should remain on hold has dropped from 71 per cent to 65 per cent.

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

The board’s confidence a rate hike is needed has also fallen – from 14 per cent to 11 per cent.

“Our confidence in a required rate cut has increased from 14 per cent to 24 per cent,” said Shadow Board Chair, Dr Timo Henckel.

“Looking at the data, Australia’s inflation rate remains well below the RBA’s official target range of 2-3 per cent, and unemployment rose slightly to 5.3 per cent.”

“Wage growth remains low at 0.7 per cent.”

Yields on Australian 10-year Government bonds have rebounded to around 1 per cent after reaching all-time historical lows of 0.89 per cent.

“These yields are still exceptionally low,” Dr Henckel said.

The Australian share market also rallied for much of September, with the S&P/ASX 200 stock index trading near 6,700.

While this reflects the overall strength of global share markets, Dr Henckel believes the global economy continues to face the prospect of a downturn.

“This is a concern publicly expressed by the new IMF head Kristalina Georgieva, who admitted she was taking on her new role at a time of faltering economic growth, trade tensions and historically high debt levels,” Dr Henckel said.

“The uncertainty surrounding Brexit is likely contributing to a continued softening of the European economy. The sabre rattling between the US and Iran is likewise cause for concern.”

Looking ahead, the Shadow Board believes a rate cut will likely be the most appropriate decision in six months.

The probability attached to a rate cut stands at 44 per cent (up from 37 per cent in September).

The estimated probability the cash rate should remain at 1 per cent long-term is 35 per cent, largely unchanged from last month.

The probability attached to rate hike is 21 per cent – down from 28 per cent in September.

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

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.