Outcome-March 2012

If monetary policy is "about right", what are the odds that it's wrong?

Glenn Stevens, Governor of the RBA, argues that monetary policy is "about right for the moment". The emphasis on the word "about" reflects the inherent uncertainties of assessing current macroeconomic conditions. How likely is it that the target cash rate is at the wrong level?

The public needs information about probabilities in order to assess the odds. Unfortunately, central banks don't typically provide this level of detail about uncertainty.

The CAMA Shadow Board provides the necessary probabilities for each board member, and at the aggregate board level. It does not provide a forecast of actual RBA Board behaviour.

Professor Vahey, non-voting chair of the CAMA Shadow Board, has provided the following summary of the aggregate view for March:

  • Highest weight (around 60 percent) given to 4.25 (the RBA Board setting for February);
  • Roughly 30 percent probability that the RBA Board should cut by at least 25bp (relative to February);
  • Approximately 10 percent probability they should raise by 25bp;

The probability that the cut should be by 50bp or more is around 5 percent.

Please note that the CAMA Shadow Board does not aim to predict RBA Board behaviour. In common with shadowing exercises in other countries (eg the US Shadow Open Market Committee), this is a normative exercise in control, not forecasting.

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Paul Bloxham
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Mark Crosby
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Mardi Dungey
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Saul Eslake
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Bob Gregory
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Warwick McKibbin
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James Morley
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Jeffrey Sheen
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Mark Thirlwell
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