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.

May
2016

New Inflation Number Not Enough to Warrant Rate Cut: RBA Shadow Board

Consumer prices unexpectedly fell 0.2% in the first quarter of this year, driven by lower prices for energy and fresh food items. The annual CPI rose 1.3%, well below the RBA’s target band of 2-3%. The Reserve Bank’s preferred measure of core inflation, which excludes volatile items such as food and energy, rose 0.2% in the quarter, slightly less than widely expected. The unemployment rate fell to 5.7%, while the global economy continues to expand only modestly. The CAMA RBA Shadow Board’s policy preferences have turned mildly more accommodative though there remains a strong consensus for keeping the cash rate on hold, attaching a 63% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 29%, while the confidence in a required rate hike remains unchanged at 8%.

According to the latest ABS figures, Australia’s unemployment rate fell again and now stands at 5.7%. The participation rate remained steady at 64.9%. Nominal wage growth remains very modest and low inflation will tend to reinforce this.

The Aussie dollar fell two cents, relative to the US dollar, in the wake of the new inflation numbers. As markets assess the likelihood of a rate cut this month or next, the Aussie dollar, now trading at around 77 US¢, may experience further selling pressure.

Yields on Australian 10-year government bonds remain unchanged at just above 2.5%. Global stocks and commodities continued to advance. As in the previous month, no substantive news has been released to revise policy makers’ view of the tepid state of the world economy, with the US economy still outperforming Europe, Japan, the BRICS countries and other developing economies.

Consumer and producer sentiment measures are softening. The Westpac/Melbourne Institute Consumer Sentiment Index fell from 99 in March 2016 to 95 in April. Business confidence, according to the NAB business survey, rose from 3 to 6 in March. The AIG manufacturing index rose, but the services index, also a leading economic indicator, fell.

The Shadow Board’s confidence measures have shifted to a slightly more accommodative stance. It attaches a 63% probability (69% last month) that “no change” is the appropriate policy, a 29% probability (23% last month) that a rate cut is appropriate and an 8% probability (unchanged from last month) that a rate rise, to 2.25% 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 2% equals 29% (down one percentage point from April). The estimated need for an interest rate decrease has risen four percentage points to 29, while the need for a rate increase has fallen three percentage points to 42. A year out, the Shadow Board members’ confidence that the cash rate should be held steady remained unchanged at 19%, while the confidence in a required cash rate decrease equals 19% (18% in April) and in a required cash rate increase 61% (62% in April).

May
2016

No comment.

May
2016

Despite falls in inflation in Australia there is no compelling reason for a rate cut, with little prospect of further deflation in the medium term and global prospects stable for the moment. At the 6 to 12 month horizon the most likely outcome still seems likely to be some rises in the Fed funds rate and so resulting pressure for the RBA to raise rates late in this year or early into 2017.

May
2016

No comment.

May
2016

No comment.

May
2016

No comment.

May
2016

No comment.

May
2016

The unexpected weakness in inflation, including in underlying measures, suggests that the RBA should cut the policy rate by 25 basis points.

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