Australia’s official interest rates have gone as low as they need to and should remain on hold in September, The Australian National University (ANU) RBA Shadow Board has found.
The Board of the Reserve Bank of Australia (RBA) lowered the official cash rate by 25 points to a record low 1.5 per cent in August and will meet on Tuesday 6 September 2016 to review interest-rate settings. It will be the last board meeting for outgoing RBA Governor Glenn Stevens.
Chair of the RBA Shadow Board Dr Timo Henckel said while employment figures could be showing a softening labour market, there was no need for rates to go any lower.
“After the RBA’s decision in August to cut the cash rate to a historic low of 1.5 per cent, there is good reason to pause. The RBA Shadow Board clearly believes that the cash rate should not be cut any further,” Dr Henckel said.
He said the RBA Shadow Board attached a 57 per cent probability that holding rates steady was the appropriate policy setting, compared to 54 per cent in August.
The confidence attached to a needed rate rise was 38 per cent, compared to 18 per cent in August.
However, the probability that a further rate cut was justified is down to just five per cent, compared to 28 per cent in August.
Dr Henckel said Australia had no immediate inflationary pressures, with unemployment down slightly to 5.7 per cent, consumer price inflation at 1.0 per cent year-on-year and well below the RBA’s two to three per cent target band, and wages growth at a modest 2.1 per cent year-on-year.
However, the increase in part-time employment relative to full-time employment could be a 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,” Dr Henckel said.
Internationally, prospects for economic growth in the major economic regions continue to be modest.
He said US investment was likely to continue to be relatively weak ahead of the US elections in November, while Brazil’s economic fortunes remain uncertain following the Olympics and deposition of President Dilma Rousseff.
Imbalances in the Eurozone could also further pressure Germany to increase spending and provide stimulus for the region.
In the longer term, the Shadow RBA Board placed a 65 per cent probability on the need for rates to increase in six months, up from 48 per cent in August.
The probability that rates should remain at 1.5 per cent in six months was 24 per cent from 23 per cent in August, while the probable need for rates to fall in six months was down to 11 per cent from 29 per cent in August.
The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at the ANU Crawford School of Public Policy.
It brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behavior.
The RBA Shadow Board includes Professor Bob Gregory and Professor Warwick McKibbin, who have both served on the RBA Board.
Other members are Paul Bloxham of HSBC; Dr Mark Crosby; Professor Guay Lim of the University of Melbourne; James Morley of University of New South Wales; Jeffrey Sheen of Macquarie University; Mardi Dungey of University of Tasmania; and John Romalis, Professor of economics at the University of Sydney.