CAMA RBA Shadow Board

On the first Tuesday of every month (except in January) the Board of the Reserve Bank of Australia (RBA) meets to decide on a target for the cash rate. This decision is highly significant for the wider economy and is therefore closely monitored by the financial markets. The CAMA RBA Shadow Board, consisting of nine voting members and one non-voting chair, all distinguished macroeconomists, offers its own policy recommendation on the Monday before the official RBA decision. Members give probabilistic assessments of the appropriate target rate for each round, which are then aggregated. The higher the percentage attached to a given cash rate, the greater the confidence that this rate is the appropriate target.

For questions regarding the CAMA RBA Shadow Board please contact Dr Timo Henckel.

July
2016

Rates Should Stay On Hold Under Election, Brexit Uncertainty

The unexpected outcome of the Brexit vote injected a good dose of uncertainty and volatility into financial markets, especially in Europe and the UK. A flight to safety saw the US dollar appreciate relative to other currencies and, while currencies and stock markets have settled down, the Brexit vote will likely echo for a long time to come, durably changing the European political landscape. Domestically, the federal election has turned out much closer than many expected and it could be some time before the result is finalised. Without new economic data to go by, it is the political uncertainty that dominates the outlook. Relative to last month, the CAMA RBA Shadow Board’s policy preferences have become noticeably more dovish, reversing the more contractionary stance from the previous month. The Shadow Board attaches a 63% probability to a rate hold being the appropriate policy setting. The confidence attached to a required rate cut equals 18%, while the confidence in a required rate hike equals 19%.

Australia’s unemployment rate and participation rate remain unchanged at 5.7% and 64.8%. No new data on wage growth has been released since last month.

The turmoil in the financial markets following Brexit has left the Aussie dollar stronger relative to the US dollar; it is trading around 75 US¢. Yields on Australian 10-year government bonds have continued to fall to historic lows, below 2%.

Domestic share prices, though slightly more volatile, are largely moving sideways, with the S&P/ASX200 last week closing just under 5300, not far below the recent high of 5430. Global stocks, particularly in European and British markets have lost between 5% and 10% of their value, following the Brexit vote.

In the wake of the Brexit vote, the global economic outlook is currently dominated by politics, with elections looming in a number of countries and uncertainty in Europe and elsewhere working its way through the global economy. The direct effect of the Brexit outcome on the Australian economy should be minimal but through global capital markets and international trade this far-away event may eventually be felt after all.

Consumer and producer confidence have barely shifted since last month. Capacity utilisation has risen to above 82%, while construction output has declined slightly. Retail sales have been growing by a little over 3% year-on-year.

The Shadow Board’s confidence measures have reversed somewhat since last month. It attaches a 63% probability (52% last month) that “no change” is the appropriate policy, an 18% probability (11% last month) that a rate cut is appropriate and a 19% probability (37% in the previous month) that a rate rise, to 2.00% or higher, is appropriate.

The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.75% equals 23% (24% in June). The estimated need for an interest rate decrease has risen from 16% to 29%, while the need for a rate increase has fallen 12 percentage points to 48%. A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 18% (14% in June), while the confidence in a required cash rate decrease equals 26% (16% in May) and in a required cash rate increase 56% (70% in June).

July
2016

No comment.

July
2016

The Brexit vote has obviously caused volatility in financial markets in recent days, but this Leave result has changed nothing in terms of Australia’s fundamentals. EU GDP is still only about 3% above pre GFC levels, and the ongoing weak growth has had little impact on Asian economies. The UK is no longer an important trading partner for Australia, and the Brexit result should strengthen not weaken our relationships with the UK. In short there is very little reason for the RBA to cut rates until the next inflation number is released.

July
2016

The uncertainty created by Brexit substantially dampens the international outlook in the mid-term. This slowdown and uncertainty will impact on Australian markets, and consequently reduce opportunities for future growth. I have revised my expectations of appropriate policy levels downwards so that on balance I now believe current settings are appropriate. However, the current events do not require a further cut in the rates at this point, through luck and good management the economy already has in place the stimulatory policy needed to help credit markets weather this latest development.

July
2016

No change since last time even despite Brexit.

I just feel as though we should have come to the end of interest rate cuts until something really dramatic happens and as you might know I even think we have gone a little too far.

July
2016

No comment.

July
2016

The surprise outcome of the Brexit referendum in Britain has increased risk in the global economy and has significant implications for Britain as well as for other countries in the EU and the Eurozone in particular who are under severe economic stress. This will emerge over time The effects on Australia are likely to be small through the international trade channel but shifts in global capital following the risk shock and changes in confidence in the Australian economy can be significant. The distribution of interest rate outcomes in my vote over the next 12 months has shifted to the left however my best guess of the most likely appropriate setting of interest rates at the 1,6, and 12 months has not changed.

July
2016

Brexit represents a negative financial and economic shock to the world economy. However, the extent of financial shock appears minimized enough that the RBA does not need to respond directly to it. Instead the RBA should keep its focus on domestic conditions. Meanwhile, the economic shock of Brexit is longer-term and uncertain as we wait to see the repercussions for the UK and the EU, but it is not something to be addressed by Australian monetary policy.

July
2016

No comment.

July
2016

Given the election in early July, the uncertainty following the Brexit referendum result, global financial market volatility, and Q2 inflation becoming available in late July, I strongly recommend not changing the cash rate at the July meeting. However in the next 6 and 12 months, I believe the current global frailty is likely to worsen and therefore my expected recommendations are weighing further towards cutting the future cash rate.

Updated:  25 February 2016/Responsible Officer:  Crawford Engagement/Page Contact:  CAMA admin