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. If you wish to access the database of past voting records for research purposes, please contact cama.admin@anu.edu.au.

September
2016

No Need for Rates To Go Lower After Last Month’s Cut: Shadow Board

After the RBA’s decision in August to cut the cash rate to a historic low of 1.5%, there is good reason to pause. Unemployment fell slightly, but only because of a large increase in part-time employment. With consumer price inflation equalling 1.0% year-on-year, well below the RBA’s 2-3% target band, and wage growth a modest 2.1% year-on-year, there exist little immediate inflationary pressures. The CAMA RBA Shadow Board clearly believes that the cash rate should not be cut any further. The Shadow Board attaches a 57% probability to a rate hold being the appropriate policy setting. The confidence attached to a required rate cut equals a mere 5%, while the confidence in a required rate hike equals 38%.

Australia’s unemployment rate fell ever so slightly, to 5.7%, according to the Australian Bureau of Statistics, as did the participation rate, which stands at 64.88%. June’s (revised) increase in full time employment of 44,000, was completely reversed in July. Furthermore, part-time employment, after falling by 33,200 in June, increased by a whopping 71,590 in July. The overall increase in part-time employment, relative to full-time employment, may be cause for concern. While it may reflect a flexible, nimble labour market, it could also be a sign that the labour market is softening, capturing a degree of underemployment. The seasonally adjusted wage price index increased by 2.1% year-on-year in the second quarter of 2016, unchanged from the previous quarter.

For the last month the Aussie dollar, relative to the US dollar, has been range-bound, trading between 75 US¢ and 77 US¢. Yields on Australian 10-year government bonds rarely budged, remaining at their historic lows below 2%.

Domestic share prices peaked on 1 August and have retreated slightly since then. Worldwide, after the three-week rally in July, most stocks have been going sideways, confirming the old adage that August is a slow month for the share market.

Absent any major surprises in the world economy, prospects for economic growth in the major economic regions continue to be modest. Jobs growth in the US has been solid in June (292,000) and July (255,000), but predictions for the August statistic, to be announced on 2 September, are smaller. US investment numbers continue to be relatively weak and these are unlikely to improve significantly prior to the US election in November. Brazil’s economic fortunes, after the recent deposition of its President, Dilma Rousseff, remain highly uncertain. Germany’s fiscal surplus of 1.2% of GDP for the first half of 2016 is not matched by the periphery’s economies. The imbalances between Germany and its Eurozone partners will generate further pressure for Germany to increase spending and provide stimulus for the region.

Consumer confidence, as measured by the Westpac-Melbourne Institute Consumer Sentiment Index, rose slightly. The manufacturing PMI, which measures the performance of the manufacturing sector based on surveys of 200 industrial companies, fell dramatically last month, from 56.40 to 46.90, the lowest reading since June 2015. Numbers for this month’s Services PMI have yet to be released. Capacity utilization remains just above 81%; after a big gain in June, the AIG Construction Performance Index receded slightly, from 53.2 to 51.6 in July.

The Shadow Board attaches a 57% probability (54% last month) that “no change” is the appropriate policy, a 5% probability (28% last month) that a rate cut is appropriate and a 38% probability (18% in the previous month) that a rate rise, to 1.75% or higher, is appropriate. The substantial increase in the confidence attached to a rate rise (and the corresponding fall in the probability confidence attached to a rate cut) reflect the Shadow Board’s mild disagreement with the RBA’s decision to cut the cash rate in August.

The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50% is virtually unchanged at 24%, one percentage point up from the previous month. The estimated need for an interest rate decrease equals 11% (29% in August), while the need for a rate increase equals 65% (48% in August). A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 18% (16% in August), while the confidence in a required cash rate decrease equals 10% (26% in August) and in a required cash rate increase 72% (58% in August).

September
2016

No comment.

September
2016

With the FED now more likely to raise in coming months there should be no motivation for any further cuts in the cash rate. While Japan and Europe may persist with their futile policies for a while yet, these policies should not influence policymakers in other advanced economies. Recent rate cuts should be given a chance to feed through to inflation, though the impacts on aggregate demand and inflation are likely to be very limited. This raises questions for the future of monetary policy in this country as further cuts are likely to be even less effective than the most recent two cash rate cuts.

September
2016

No comment.

September
2016

I want to stick with the same distributions as last time even though I think they will be cutting again soon. I would rather delay the cut until things become a bit clearer. I really do think they have fuelled the housing price boom well beyond what they should have done, but we will see.

September
2016

No comment.

September
2016

No comment.

September
2016

No comment.

September
2016

No comment.

September
2016

The cash rate was reduced last month, consistent with the balance of my recommendation. Low interest rates will be necessary for some time to help stimulate capital expenditure, which continues to fall largely due to mining investment. With real wages hardly changing, there remains insignificant upside risk to inflation. I expect my central recommendation of no cash rate change to persist for the next 12 months. The burden of rebalancing and growing the economy needs to shift now towards fiscal policy.

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