tag:theconversation.com,2011:/au/topics/cama-11265/articlesCAMA – The Conversation2015-06-01T02:07:57Ztag:theconversation.com,2011:article/425462015-06-01T02:07:57Z2015-06-01T02:07:57ZInterest rates should fall no further: RBA Shadow Board<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set. Timo Henckel is the non-voting chair of the Board.</em></p>
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<p>The RBA’s decision to cut the cash rate to 2% last month went against the recommendation of the CAMA RBA Shadow Board. Since then economic data continues to show signs of weakness. Unemployment is up slightly, investment down, and consumer and business confidence remain fragile. </p>
<p>The international economy continues to pose a threat to the Australian economy and inflation remains comfortably within the RBA’s target band. But asset prices, Sydney house prices in particular, continue to post high gains. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm but believes the cash rate has bottomed and an increase is due in the near future. In particular, the Shadow Board recommends the cash rate be held at its current level of 2%; it attaches a 60% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals a mere 2%, while the confidence in a required rate hike stands at 38%.</p>
<p>According to the Australian Bureau of Statistics, Australia’s jobless rate edged up to 6.2% in April. Worryingly, in the same month full-time employment, total employment and the participation rate have fallen. Wage growth remains at a record low: the Australian wage price index increased by 2.3% in the last quarter, well below the average of 3.5% for the period 1998-2015.</p>
<p>The Australian dollar remains range-bound between US76¢ and US80¢. Yields on Australian 10-year government bonds have increased further, to 2.84%, from its recent low of 2.59%, implying a steepening of the yield curve, normally a bullish sign.</p>
<p>Regional housing markets, particularly Sydney and Melbourne, and domestic share prices remain buoyant. This remains a primary concern for many Shadow Board members as the asset price increases coincide with an increase in private sector leverage, leading to misallocated investment and opening up the possibility of a costly price correction. According to the Reserve Bank of Australia total housing credit grew by 7.2% (year-ended) in April 2015, compared to 6% in April 2014.</p>
<p>The international economy remains subdued. For Europe, a noticeable pickup in growth is not on the horizon, at least not until the Greek debt crisis is resolved. Recent revisions of US data indicate that US growth this year has been slower than initially thought, with some analysts suggesting the US economy actually contracted in the first quarter. Without a string of good news about the US economy, the Federal Reserve Bank’s increase of the cash rate is likely to be pushed back ever more. Commodity prices are likely to remain soft and possibly fall further.</p>
<p>Consumer and producer confidence measures continue to be mixed. However, of particular concern is the outlook for domestic investment. The ABS survey of chief financial officers conducted in April and May of this year reveals that total capital expenditure is still expected to fall significantly, with the current estimate for fiscal year 2015-16 being 24% less than the corresponding estimate for fiscal year 2014-15. The trend volume estimate for total new capital expenditure fell 2.3% in the March quarter 2015 while the seasonally adjusted estimate fell 4.4%.</p>
<h2>What the Shadow Board believes</h2>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level of 2% equals 60%. The confidence that a rate cut is appropriate is a mere 2%, whereas the Shadow Board considers it much more likely (38%) that a rate increase, to 2.25% or higher, is the appropriate policy decision for this month.</p>
<p>The probabilities at longer horizons are as follows: six months out, the estimated probability that the cash rate should remain at 2% equals 23%. The estimated need for an interest rate increase lies at 76%, while the need for a rate decrease is estimated at 3%. </p>
<p>A year out, the Shadow Board members’ confidence in a required cash rate increase equals 81%, in a required cash rate decrease 2% and in a required hold of the cash rate 17%.</p>
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<h2>Comments from Shadow Reserve bank members</h2>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“The case for a cut or cuts in the near future does not seem to be as strong as in past months.”</strong></p>
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<p>Further signs that the economy is not weakening further, so that the case for a cut or cuts in the near future does not seem to be as strong as in past months. Still uncertainty on the global front, with the ever present possibility that Greece may finally default. But does not seem that would have longer term effects on global economies. As a result the longer term outlook would be for a start towards rate normalisation within 12 months.</p>
<hr>
<p>Mardi Dungey, Professor and Deputy Head, School of Economics and Finance at University of Tasmania:</p>
<p><strong>“I recommend that a higher policy rate should have been maintained.”</strong></p>
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<p>The RBA’s decision to ease monetary policy in May - the timing of which was partly to meet the “challenges of communication” (RBA Minutes of Board Meeting for May 2015) associated with the timing of the Federal Budget - is a gamble
that accommodative monetary policy can overcome the problems of the inactive role fiscal policy is currently playing in macro policy making. As there seem to be few signs of improvement on the fiscal front, the RBA is taking a risk that looser monetary policy can fill part of this role and not cause structural problems elsewhere. </p>
<p>The Board meeting minutes make clear that most domestic conditions are if anything only a little weaker than in previous months; and there is considerable uncertainty as to whether consumption will respond similarly to that experienced in pre-crisis conditions – given the rather nasty scare experienced by many in the economy, it seems unlikely we will seem this type of response to lower rates. </p>
<p>More likely is that looser credit will inflate house prices – an area where the fiscal reform agenda could make substantial improvements by removing a number of incentives to over-invest in housing. Given the hand that the RBA has been played, it is not unreasonable that they chose to move rates. However, if all arms of policy were playing a role in active economic management this would not be the path I would recommend. </p>
<p>For that reason, my recommendations are based on the presumption that monetary policy cannot reasonably be expected to manage single-handed and that it is able to follow its usual best-practice course in setting policy in partnership with other arms of policy making, in which case I recommend that a higher policy rate should have been maintained.</p>
<hr>
<p>Warwick McKibbin, Chair in Public Policy, ANU Centre for Applied Macroeconomic Analysis (CAMA) , Crawford School of Public Policy at Australian National University:</p>
<p><strong>“The distortion low interest rates is causing in asset markets is worsening.”</strong></p>
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<p>Continued weakness in nominal GDP growth in Australia implies that the neutral policy interest rate continues to fall. However, evidence of rising asset prices, particularly in the housing markets of Sydney and Melbourne, makes the setting of interest rates increasingly complex. From the point of view of short term macroeconomic factors, low interest rates in Australia could be justified; however, the distortion this is causing in asset markets is worsening. </p>
<p>This highlights the difficult trade-off between short term growth and medium term vulnerability. My judgement is that the damage caused by a painful adjustment in the housing market and the high levels of leverage by households in an environment of a downward adjustment in trend economic growth is a dangerous mix that loose monetary policy and even more financial leverage cannot solve. Add to this situation, the move to normalise interest rates in the US and there are many bad scenarios for Australia that are plausible. </p>
<p>I recommend leaving interest rates unchanged (indeed I would not have lowered them to the current level). Monetary policy should be focused on medium term stability especially if it has little prospect of solving the problems that cause weak short term demand. There is strong evidence that a point have been reached where monetary policy cannot offset the core problems caused by uncertainty about economic and political prospects in the Australian economy. </p>
<p>The lack of substantial policy assistance from fiscal rebalancing or substantive economic reform generally, is increasingly backing the Reserve Bank into a corner. It appears that many politicians do not appreciate the risks that now face the Australian economy. No wonder investment is weak and uncertainty is damaging economic prospects in Australia. It may be that the optimistic projections in the recent federal budget turn out to be correct, however, the vulnerabilities within the Australian economy are growing and lower interest rates without
any other policy response makes this situation worse.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“The RBA has scope to hold the policy rate steady.”</strong></p>
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<p>The relatively stimulative federal budget and the recent lower level of the Australian dollar mean that the RBA has scope to hold the policy rate steady this month and even start raising it back to its neutral level over the medium term.</p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The cut in the cash rate to 2% in May was the right move.”</strong></p>
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<p>In my opinion, the cut in the cash rate to 2% in May was the right move. My expectation is that it should remain at this level until at least early 2016. The net saving glut in Australia continues to be a problem. Consumption growth is unlikely to contribute much to growth normalisation because of the relatively high levels of household debt. Growth recovery will have to come largely from business investment, which unfortunately shrank badly in the March quarter and continues surprisingly in waiting mode, despite low interest rates. </p>
<p>The proposed federal budget in May 2015 turned less austere than anticipated, reducing one obstacle to the return to normal growth. The 20% trade-weighted exchange rate depreciation over the last 24 months will help growth recovery
by boosting non-mining exports, but this boost should continue for a while to be more than cancelled by the falling value of mining exports. </p>
<p>Overall, upside inflation risk remains minimal since wages growth is modest and energy prices are unlikely to rise much. The outlook for Greek debt negotiations looks grim, with possible negative ramifications for global asset markets. Therefore, the Australian economy needs its current monetary policy push to remain for some time yet, and needs a stronger fiscal push.</p><img src="https://counter.theconversation.com/content/42546/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR).</span></em></p>Last month’s cash rate cut should not be repeated, say the majority of Reserve Bank Shadow Board members.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/397782015-04-07T02:47:55Z2015-04-07T02:47:55ZFinancial markets expect a cut, but RBA Shadow Board says hold<p>Financial markets are pricing in a 75% chance of a rate cut when the RBA meets, which would be its second such move this year. </p>
<p>However, the CAMA RBA Shadow Board advises against this. The central dilemma for the RBA persists: spur growth with loose monetary policy and risk exaggerated asset prices that lead to a misallocation of capital and costly adjustment in the future, or hold the line on monetary policy and risk an imminent weakening of aggregate demand. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm but still considers it necessary that the cash rate is lifted in six-12 months. In particular, the Shadow Board recommends with confidence that the cash rate be held at its current level of 2.25%; the Board attaches a 64% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 16%, while the confidence in a required rate hike stands at 19%.</p>
<p>Australia’s jobless rate, according to the Australian Bureau of Statistics, edged down to 6.3% in February, due both to an increase in employment and a marginal decline in the participation rate. There are no signs that wage growth is wakening from its torpor, making it unlikely that consumer spending will pick up significantly.</p>
<p>The Aussie dollar continued to slide and now fetches about US75¢. As yields on Australian 10-year government bonds are now down to 2.35%, barely 40 basis points higher than for US Treasuries, global investors will search for yield elsewhere. A further decline of the Aussie dollar may well be on the cards.</p>
<p>Sydney’s inflated housing market remains cause for concern, as prices rose 3.3% month-on-month in March alone. The local stock market is also performing strongly, the ASX200 closing at 5900 just before Easter.</p>
<p>Global weakness and uncertainty keep battering the domestic economy. European growth remains soft while Germany is searching for solutions to the Greek debt crisis. Brazil is faltering and Russia, suffering from weak energy prices and political scandals, is experiencing a dramatic slowdown. China will aim for an annual growth rate of 7%, in line with previous announcements, while the US economy continues to expand modestly. The Federal Reserve Bank’s rhetoric points to a measured increase in the cash rate in the near future.</p>
<p>Confidence measures continue to be mixed. Consumer confidence slipped marginally, with the Westpac Consumer Sentiment Index coming in at 99.47 this month (100.7 in the previous month). Capacity utilisation edged up from 79.94% in January to 80.42% the following month. </p>
<p>The manufacturing PMI increased to 46.29 in March from 45.51 in February, while the services PMI advanced significantly, from 49.50 index points in January to 51.70 index points in February, the highest in more than a year. At the same time business confidence, as reported by the National Australia Bank, decreased to 0, the lowest in more than a year.</p>
<h2>What the CAMA Shadow Board believes</h2>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level of 2.25% is unchanged at 64%. There is far less confidence (16%, up from 14% in March) that another rate cut is appropriate whereas the Shadow Board considers it more likely (19%, down from 22% in March) that a rate increase, to 2.5% or higher, is the appropriate policy decision for this month.</p>
<p>The probabilities at longer horizons are as follows: six months out, the estimated probability that the cash rate should remain at 2.25% equals 31% (unchanged from March). The estimated need for an interest rate increase lies at 53% (down from 56%), while the need for a rate decrease is estimated at 16% (up from 13%). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 63% (down one percentage point), in a required cash rate decrease 16% (up four percentage points) and in a required hold of the cash rate 24% (down two percentage points).</p>
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<img alt="" src="https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
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</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77137/original/image-20150407-26473-1gxljeq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=453&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Comments from Shadow Reserve bank members</h2>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Monetary policy in Australia is loose enough.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77142/original/image-20150407-26479-awc72n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Ongoing uncertainty in the global economy continues to dominate the outlook, with uncertainty around Greece and Europe, and China being the most important factors affecting monetary policy. The most likely outcome is that Greece will continue to
muddle through, and China will find a way to achieve near 7% GDP growth in 2015, so that monetary policy in Australia is loose enough at present settings. Worsening in the global outlook should see further rate cuts, while ongoing stability should see the RBA looking to normalise rates early in 2016.</p>
<hr>
<p>Warwick McKibbin, Professor, RSE, ANU, CAMA</p>
<p><strong>“The RBA faces a difficult choice.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77143/original/image-20150407-26512-1wq2p1d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77145/original/image-20150407-26515-19s46oz.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=468&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
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</figure>
<p>Cutting interest rates will likely further inject a bubble into asset markets which will lead to high economic costs when the policy unravels. Ultra low interest rates are not a substitute for dealing with the structural adjustment that the Australian economy needs to undertake. The longer that economic reform is postponed through political stalemate the more difficult the job of monetary policy will become. The ultimate questions for the RBA is what is the objective of the current policy and what be the most likely ultimate outcome of continually lowering interest rates in the current economic environment? </p>
<p>Is the goal to drive the economic adjustment to the commodity price decline or is it to buy time by artificially stimulating asset values in the economy to sustain demand until the politicians that are blocking needed economic reform realize the folly of their actions? It may be possible for the RBA to drive the adjustment but it is more likely that it can only postpone a structural slowdown. </p>
<p>Creating a significant misallocation of capital in an economy that will ultimately also need significant structural adjustment while perhaps attractive in the short term, will likely create a proliferation of problems that will converge at some point in the not too distant future. My view is the RBA should hold its ground and focus attention on highlighting the fundamental economic problems that other policies need to address. </p>
<p>Perhaps with luck, ultra-low interest rates might bridge the economic vacuum created by parliament. But the more likely outcome is that cutting interest rates further without other policy support, will ultimately create another painful economic adjustment that Australia did not need to have.</p>
<hr>
<p>John Romalis, Professor of Economics at the University of Sydney:</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77147/original/image-20150407-26483-1m9qz2n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption"></span>
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</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77146/original/image-20150407-26502-1ke5ht7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=468&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
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<p><strong>“Potential costs down the line.”</strong></p>
<p>Although economic activity and inflation are likely to remain subdued in the near term, we have to wonder whether the short-term benefits of any additional monetary stimulus are sufficient to offset any potential costs down the line stemming from rapid increases in property rises in some markets.</p>
<hr>
<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set. Timo Henckel is the non-voting chair of the Board.</em> </p>
<p><em>See all the Board’s April deliberations <a href="https://cama.crawford.anu.edu.au/rba-shadow-board/outcome/2015-04">here</a>.</em></p><img src="https://counter.theconversation.com/content/39778/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR).</span></em></p>Financial markets have factored in a cut to Australia’s cash rate, but economists - including the CAMA Shadow Board - aren’t so sure.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/325652014-10-06T05:46:17Z2014-10-06T05:46:17ZFalling Aussie dollar to weigh on interest rates decision<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set.</em></p>
<hr>
<p>After lingering around the US93 cents mark for several months, the Aussie dollar recently depreciated by approximately US5 cents, while other domestic and international economic data continues to be mixed. This fall should help stimulate and rebalance the domestic economy, but to what extent is uncertain. </p>
<p>The CAMA RBA Shadow Board recommends the cash rate remain at its current level, yet there is growing confidence that it ought to be raised in 6-12 months. The Board attaches a 71% probability that the cash rate ought to remain at 2.5% in October. The confidence attached to a required rate cut equals 4%, while the confidence in a required rate hike has increased to 25%.</p>
<p>The aberrant spike in Australia’s unemployment rate in July 2014 has been reversed, but slack in the labour market remains (the unemployment rate equals 6.1%). Wage pressure is therefore not a serious concern.</p>
<p>There is no new inflation data available. However, should the Aussie dollar’s relative weakness persist, this will add inflationary pressures to the domestic economy. Business indicators are weaker, with the NAB business confidence, the manufacturing PMI, and the Westpac consumer confidence index all deteriorating slightly. </p>
<p>Estimates of GDP growth are largely unchanged. The construction industry is still responding positively to the housing boom. Increased military and security expenditures will put pressure on the federal government’s bottom line while key budget measures have yet to secure passage through the Upper House.</p>
<p>The foreign exchange market has come out of hibernation during the past few weeks. The Aussie dollar lost US5 cents, partly due to the relative strength of the US dollar, partly due to retreating commodity prices. A weaker dollar ought to help boost non-mining exports; however, weaker commodity prices will hurt the mining sector.</p>
<p>The global economy is not faring as well as hoped. US GDP growth looks solid but falling inflation expectations raise the spectre of deflation and may point to future economic weakness. The Chinese economy is slowing; this is acknowledged by Chinese policy makers, along with the need to restructure and rebalance the Chinese economy. </p>
<p>Uncertainty about Chinese growth and official announcements to aim for more ambitious CO2 emission reductions point to sustained weakness of commodity prices and Australia’s terms of trade. News of Europe’s economies is not good as several Eurozone countries are flirting with recession. The military efforts in the Middle East, along with heightened security measures, will likely drag the global economy down.</p>
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<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at its current level of 2.5% is 71%, down 3 percentage points from September. The probability attached to a required rate cut equals 4% (6% in September) while the probability of a required rate hike has risen to 25% (21% in September).</p>
<p>The probabilities at longer horizons are as follows: six months out, the probability that the cash rate should remain at 2.5% fell considerably, from 49% in September to 38% in October. The estimated need for an interest rate increase rose to 56% (42% in September), while the need for a decrease equals 7% (9% in September). A year out, the Shadow Board members’ confidence in a required cash rate increase is up 10 percentage points to 71%, the need for a decrease ticked down to 9%, while the probability for a rate hold dropped to 20% (29% in September).</p>
<p>Note: Mark Crosby did not vote in this round.</p>
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<h2>Comments from Shadow Reserve bank members</h2>
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<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
<p><strong>“The lower currency will improve competitiveness.”</strong></p>
<p>The major development this month has been a substantial decline in the Australian dollar. Last month this was the key tension for the monetary policy outlook. The combination of a high currency and falling commodity prices was squeezing local incomes and the high Australian dollar was also constraining local competitiveness. The Australian dollar has fallen due to both US dollar strength and further declines in commodity prices. </p>
<p>Assuming the lower level of the currency is sustained, it should be expected to support a further lift in local demand over time, as it helps to improve competitiveness and supports local incomes. At the same time, the lower currency will add upside risk to the inflation outlook, which supports the case for lifting interest rates, at some point, particularly given that the housing market is continuing to show signs of exuberance. </p>
<p>However, given the current looseness of the labour market and the likely dampening impact that this will continue to have on wages growth, I expect that the upside risks to near-term inflation are still only modest. I recommend the cash rate is left unchanged this month. Looking further forward, I continue to expect that the cash rate may need to be lifted in the next 6-12 months, partly to prevent a housing bubble from inflating.</p>
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<p>Bob Gregory, Professor of Economics at Australian National University:</p>
<p><strong>“I am still not moving much on interest rates.”</strong></p>
<p>Six months ahead I am changing slightly I think, but the housing market is confusing me a lot. I favour some short run intervention of some sort but very unlikely that RBA will be able to put something together quickly.</p>
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<p>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University:</p>
<p><strong>“Hiking the cash rate may dampen further falls in the Australian dollar.”</strong></p>
<p>Getting the stance of monetary policy right is difficult at the moment. Keeping interest rates low may encourage further rises in house prices but hiking the cash rate may dampen further falls in the Australian dollar. On balance, it might be better to leave the cash rate unchanged this month as the outlook for growth and employment remains weak.</p>
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<img alt="" src="https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60856/original/znycs9gf-1412568466.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“There is a strong impetus for the RBA to begin a tightening cycle soon.”</strong></p>
<p>The forecast for the Australian economy is mixed. The collapse of the iron ore price and a generally weaker outlook for China will be a clear drag on the Australian economy going forward. However, the lower Australian dollar and a more robust recover in the United States could help offset weakness in the export sector.</p>
<p>Domestically, it seems clear now that negative short-term real interest rates have fuelled excessive growth in residential and commercial real estate prices. Combined with inflation running at the top end of the RBA’s target range, there is a strong impetus for the RBA to begin a tightening cycle soon, especially since the large increase in the unemployment rate in July has been reversed. The main risk to the domestic outlook remains over exactly how contractionary an implemented budget will turn out to be.</p>
<p>On balance, then, the RBA should consider starting a tightening cycle before the end of the year, especially if the housing market continues to overheat and in the absence of a more sustained large upward movement in the unemployment rate.</p>
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<p>John Romalis, Professor of Economics at the University of Sydney:</p>
<p><strong>“Rates should remain constant for now.”</strong></p>
<p>Little has changed since last month, with the most notable change being a slightly weaker dollar and lower prices of some key commodities. The Australian economy still seems to be slightly soft, with some slack in labour markets contributing to low wage growth. </p>
<p>Looking forward, rising housing construction should help offset the negative effects of declining mining investment. While a slightly weaker dollar will contribute to a modest increase in inflation, weaker commodity prices will crimp the domestic economy somewhat. </p>
<p>Economic and financial conditions in our main trading partners appear to be increasingly robust, which should help restore domestic confidence and keep commodity prices at reasonable levels. So while rates should remain constant for now, there is a greater likelihood that the target cash rate should rise later in the forecast horizon.</p><img src="https://counter.theconversation.com/content/32565/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation..</span></em></p>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should…Timo Henckel, Lecturer, Research School of Economics, ANU, and Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/286012014-06-30T06:27:37Z2014-06-30T06:27:37ZCall likely to grow louder for interest rates to rise<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set.</em></p>
<hr>
<p>Australia’s economy is continuing down its path of slow and steady consolidation. The labour market is holding up and GDP growth remains solid. Consumer confidence, depressed after the government’s May budget, has improved slightly, as have several indicators of business sentiment. </p>
<p>The CAMA RBA Shadow Board’s conviction that the <a href="http://www.rba.gov.au">cash rate ought to remain steady at 2.5%</a> remains unshaken; it continues to attach a 76% probability that this is the appropriate setting. </p>
<p>The probability attached to a required rate cut has fallen two percentage points to 6%, while the probability of a required rate hike has risen slightly to 20%.</p>
<p>The <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">unemployment rate</a> again clocked in at 5.8%. Employment fell in May and fewer vacancies were posted, compared to the previous month. Labour costs have fallen slightly.</p>
<p>There is no new information about inflation until the release of second quarter inflation measures. The <a href="http://www.rba.gov.au/statistics/frequency/exchange-rates.html">Australian dollar, now worth approximately 94 US cents</a>, is strengthening slightly. Asset prices remain high, although there are possible signs that the housing market’s run is slowing, with new building approvals falling and price growth slowing. Some shadow board members, notably Professor Warwick
McKibbin, remain concerned about the distortionary effects on asset
prices of prolonged low interest rates.</p>
<p>But the global economy’s recovery remains shaky. <a href="http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_3rd.pdf">US first quarter GDP growth was weak</a>, with recent revisions to healthcare spending and a harsh winter indicating the world’s largest economy contracted by 2.9%. The Federal Reserve is continuing with its announced policy of phasing out monthly purchases but more weak economic data will presumably make the US central bank more doveish. European data is again mixed although tensions in the Ukraine appear to be waning which should reduce pressure on energy markets. Japan’s economy is improving, while China’s is steadying.</p>
<p>Promising signs for the Australian economy come from the rebound in the <a href="http://www.aigroup.com.au/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/LIVE_CONTENT/Economic%2520Indicators/PMI/2014/pmi%2520may%25202014%2520final%2520report.pdf">AIG’s manufacturing index</a>, which in May climbed 4.5 points to 49.22, half a point shy of its 15-year average. With a slight improvement in consumer confidence as well as the AIG’s services index, we may just be seeing the fruits of sustained low interest rates. Should these indicators continue to improve over the next few
months, the call for a tightening of monetary policy will likely grow
louder.</p>
<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at its current level of 2.5%
remains unchanged at 76%. The probability attached to a required rate
cut has edged down to 4% (6% in June) while the probability of a
required rate hike has risen to 20% (18% in June).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/52565/original/sd5pzqmj-1404095617.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The six month probability is the cash rate should remain at 2.5% equals 47% (46%
in June). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/52566/original/f2r3f7k6-1404095653.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The estimated need for an interest rate increase is 41% (40% in June), while the need for a decrease has fallen to 12%. A year out, the Shadow Board members’ confidence in a required cash rate increase has risen to 61% (59% in June), the need for a decrease fell to 11% (13% in June), while the probability for a rate hold has remains at 28%.</p>
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<p>Note: Mark Crosby did not vote in this round.</p>
<h2>Comments from Shadow Reserve bank members</h2>
<p><strong>“<em>Cash rate should remain unchanged</em>.”</strong></p>
<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
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<blockquote>
<p>Australia’s GDP growth was strong in the first quarter, although more timely indicators suggest some loss of momentum recently. New building approvals have fallen while growth in retail sales and housing prices has slowed.</p>
<p>Consumer sentiment has remained weak following cuts announced in the Federal budget. Local incomes are also being squeezed by the combination of falling commodity prices and a rising australian dollar in recent months. With inflation well contained and activity and income growth appearing to have softened in the past couple of months, there is little evidence to suggest that local interest rates will need to rise anytime soon. </p>
<p>At the same time, there are still signs that the domestic economy is being supported by low interest rates. Business surveys continue to suggest higher levels of confidence than last year and the labour market is showing signs of gradual improvement. I recommend that the cash rate is left unchanged this month.</p>
</blockquote>
<hr>
<p><em>“<strong>Australian rates are too low</strong>.”</em></p>
<p>Warwick Mckibbin, Professor, Australian National University, CAMA:</p>
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<blockquote>
<p>In my view current Australian interest rates are too low. The problem is that monetary policy is aimed at stimulating non-mining parts of the economy particularly housing construction. Monetary policy should focus on the growth rate of nominal GDP as a benchmark to guide interest rates. </p>
<p>Given the current growth rate of nominal GDP of around 4-5% per year, a neutral monetary policy would be a risk adjusted interest rate of at least 4.5%. Allowing for risk adjustment, this suggests the Australian policy rate should be closer to 3% and possibly even 3.5%. </p>
<p>The current stance of monetary policy is at risk of increasing demand for assets, which will drive up the price of those assets. Unless there is a supply response, that will lead to pure capital gain and ultimately a bubble which will be costly to clean up. </p>
<p>Australia faces a shift in global portfolio preferences towards Australian assets as well ultra-loose monetary policy in major countries that experiences a financial crisis causing a search for robust currencies. This means the usual channel of loose monetary policy through weakening the $A is no longer viable even if it was the goal. </p>
<p>The focus on generating economic growth should be on the supply side of the economy through cost reductions (productivity improvements) improving competitiveness. There is not much a central bank can do about this except intellectual leadership in the debate.</p>
</blockquote>
<hr>
<p><strong><em>Click <a href="https://cama.crawford.anu.edu.au/rba-shadow-board">here</a> to view the full charts of all CAMA board members.</em></strong></p>
<p><em>VERDICT FOR JULY: rates should remain steady.</em></p><img src="https://counter.theconversation.com/content/28601/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should…Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.