Timo Henckel is a Lecturer in the Research School of Economics at the ANU College of Business and Economics, and Research Fellow at the Centre for Applied Macroeconomic Analysis (CAMA) in Crawford School of Public Policy, The Australian National University.
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Moves by Australia’s major banks to increase mortgage interest rates lessens the need for official interest rates to change in April, Crawford School’s RBA Shadow Board has found.
Chair of the RBA Shadow Board Dr Timo Henckel said the higher bank interest rates, a rise in Australia’s unemployment and continued low inflation meant there was no need for a change of official interest rates.
The board of the Reserve Bank of Australia (RBA) will meet on Tuesday to review official interest rates, which have been at a record low of 1.5 per cent since August last year. However, Australia’s big four banks have all announced higher home-loan interest rates in the past month, citing higher borrowing costs.
“The RBA Shadow Board remains convinced that the cash rate should remain at its current level,” Dr Henckel said. He said the RBA Shadow board attached a 54 per cent probability that holding rates steady was the appropriate setting, down from 59 per cent in March.
The confidence attached to a needed rate cut was only three per cent (four per cent in March), while confidence in a needed rate hike was up to 43 per cent in April compared to 37 per cent in March, even with the moves by the commercial banks.
Dr Henckel said elevated house prices in Australia would also weigh on the Reserve Bank’s thinking.
“Elevated house prices and the world’s third highest household debt and debt servicing ratios will continue to weigh on the RBA’s mind as the possibility of a painful price correction, with all its implications for the macroeconomy, cannot be easily dismissed,” Dr Henckel said.
Globally, both the OECD and IMF have said growth is expected to remain tepid, with a volatile Trump Presidency in the United States and fallout from Britain’s vote to leave the EU continued drag on investment.
“While there is some positive news coming out of Asia, as trade volumes are increasing, Brexit and a volatile Trump presidency continue to put investment in a holding pattern,” Dr Henckel said.
In the longer term, the probability for a needed rate hike in six months increased to 74 per cent for April compared to 68 per cent in March.
The probability that rates should remain at 1.5 per cent in six months was 20 per cent (23 per cent in March, while the probable need for rates to fall in six months was down three points to six 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.
The RBA Shadow Board includes Professor Bob Gregory and Professor Warwick McKibbin, who have both served on the RBA Board.
Other members are Paul Bloxham of HSBC, Dr Mark Crosby, Professor Guay Lim of the University of Melbourne, James Morley of University of New South Wales, Jeffrey Sheen of Macquarie University, Professor Mardi Dungey of University of Tasmania and John Romalis, Professor of economics at the University of Sydney.
Dr Crosby did not vote in the April round.
Dr Henckel’s full commentary is available on the CAMA Shadow RBA Board website at https://cama.crawford.anu.edu.au/rba-shadow-board.