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The Australian National University

Outcome-December 2012

Academics vs Practitioners: diversity of opinions within the Shadow Board

Many economists think the RBA Board will cut the cash rate this month. With commodity prices projected to be weakening, financial markets suggest a rate cut is likely. Mind you, many practitioners suggested a cut was coming last month too, and it didn't materialise.

The nine experts on the Shadow Board, a mix of practitioners and academics, give their views on what the interest rate should be, rather than predicting actual RBA Board behaviour. The novel construction of the Shadow Board permits analysis of the individual opinions both across a range of interest rate settings and through time.

Overall, the Shadow Board strongly supports leaving rates unchanged in December at 3.25 percent, with around 55 percent weight. A decrease to 3.00 percent receives approximately 30 percent weight.

Closer examination reveals a split in views between academics and practitioners. Two practitioners, Paul Bloxham and Saul Eslake, prefer a rate cut to 3.00 percent over leaving rates unchanged this month. Although many of the academics see weakening inflationary pressures over the next six months, most prefer a slower path of adjustment for interest rates. Longer term, several experts anticipate that rates will have to rise.

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