tag:theconversation.com,2011:/global/topics/shadow-reserve-bank-3336/articlesShadow Reserve Bank – The Conversation2016-02-01T23:14:07Ztag:theconversation.com,2011:article/539612016-02-01T23:14:07Z2016-02-01T23:14:07ZLeave interest rates on hold, despite turmoil in global markets<p>The Reserve Bank of Australia meets today amid an awful start to the year for investors, with worries about slowing growth in China and rising debt levels in emerging markets adding up to substantial volatility for global securities. </p>
<p>Losses on the Australian share market are more modest but the Australian dollar has been caught in the maelstrom, dropping to US69¢ in recent weeks, but currently trading above US70¢.</p>
<p>A further weakening of the international and domestic economies may see the Aussie dollar decline further. Yields on Australian 10-year government bonds have fallen again, most recently to 2.69%, pointing to weakness in the Australian economy.</p>
<p>But academic economists who make up the CAMA Shadow Reserve Board, which follows the monthly decisions of Australia’s Reserve Bank of Australia, say rates should remain on hold. </p>
<p>Economic fundamentals remain mixed; the monthly unemployment rate is unchanged at 5.8%, but employment has barely budged, although there has been an increase in full-time employment accompanied by an offsetting decrease in part-time employment. While the participation rate is down to 65.1%, the labour market appears robust for now.</p>
<p>Inflation in the December quarter edged up to 1.7% from 1.5% in the previous quarter, remaining well below the RBA’s target band of 2-3%. Latest figures estimate annualised GDP growth at 2.5%, a slight improvement over the previous quarter. </p>
<p>The CAMA RBA Shadow Board members on balance prefers to keep the cash rate on hold, attaching a 69% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 17%, down five percentage points from the previous month, while the confidence in a required rate hike has risen to 14%.</p>
<p>Globally, the economic outlook is weakening. Even though the US Federal Reserve raised the federal funds rate in December last year, the rest of the world is teetering. Global share markets, led by China, suffered big losses in the opening weeks of the new year. Increasingly cracks are showing in emerging market economies, following excessive debt levels and plummeting commodity prices. </p>
<p>Consequently, an estimated net $740 billion flowed out of emerging markets in 2015, most of it leaving China. Further capital flight is likely, and there is a genuine risk that some countries and some financial institutions will be in serious financial difficulties. </p>
<p>Overall, global growth is likely to be sluggish, a view shared by the International Monetary Fund, which recently dropped its growth forecast for the world in 2016 from 3.6% to 3.4%.</p>
<p>In terms of consumer and producer sentiment measures, the Westpac/Melbourne Institute Consumer Sentiment Index fell from 101 in December 2015 to 97.3 in January. Business confidence, according to the NAB business survey, after a brief blip up, fell again from 5 to 3. The AIG manufacturing and services indices, leading economic indicators, both fell.</p>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level increased marginally, from 67% in December to 69%. The confidence that a rate cut is appropriate has dropped for the second time in a row and now equals 17% (22% in December); the confidence that a rate increase, to 2.25% or higher, is necessary has risen to 14% (11% in December).</p>
<p>The probabilities at longer horizons are as follows: six months out, the estimated probability that the cash rate should remain at 2% is nearly unchanged at 24% (23% in December). The estimated need for an interest rate increase is unchanged at 60%, while the need for a rate decrease has slipped to 16% (17% in December). </p>
<p>A year out, the Shadow Board members’ confidence that the cash rate should be held steady edged up a percentage point, from 18% to 19%, while the confidence in a required cash rate increase equals 66% (67% in December) and in a required cash rate decrease 16% (unchanged from December).</p>
<p>Comment from three Shadow Board members follows:</p>
<hr>
<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
<p>“Despite recent equity market volatility economic fundamentals have not changed in the past months. US and Australian job numbers remain solid, and the slowdown in Chinese GDP growth is in line with expectations. With this being the case the optimal short run setting is for no rate change, while in the course of this year rates should still be expected to rise moderately in line with the expected further tightening in the US.</p>
<hr>
<p><strong>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</strong></p>
<p>"Inflation expectations continue to remain well anchored and the unemployment rate has stabilised at a somewhat lower level in recent months (5.8% in November and December). The RBA should hold its policy rate steady this round, but with an eye to returning it back to its neutral level over the medium term.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
<p>"Asset markets have been volatile and trending down in the last 2 months, triggered largely by nervousness about China’s perhaps sharper than expected downward adjustment to a more balanced growth path. Commodity prices continue to trend
downwards, keeping inflation in check and disrupting the normal relationship between inflation and economic activity. </p>
<p>"In particular, the Australian labour market is strengthening marginally with participation and employment rising, yet wage and price inflation remain low. While this phenomenon is a dilemma for monetary policy, an even more accommodating monetary policy will become necessary if business and household sentiment do not improve.”</p><img src="https://counter.theconversation.com/content/53961/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>The global sharemarket volatility will weigh on Reserve Bank board members as they consider interest rates.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/501242015-11-03T04:51:05Z2015-11-03T04:51:05ZRBA leaves cash rate unchanged at record low 2%: experts respond<p>The Reserve Bank of Australia has decided to leave the official cash rate unchanged at a record low of 2%, but said there was scope for a rate cut down the line.</p>
<p>In a <a href="http://www.rba.gov.au/media-releases/2015/mr-15-20.html">statement</a> on the RBA website, governor Glenn Stevens said:</p>
<blockquote>
<p>At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.</p>
</blockquote>
<p>The US Federal Reserve is expected to start increasing its policy rate in the period ahead, the statement said. </p>
<p>Recent attention has focused on the widening gap between the official cash rate and the mortgage rates set by the major lenders. </p>
<p>All of the big four banks have <a href="https://theconversation.com/the-rba-should-cut-rates-but-not-because-the-banks-are-upping-them-49647">raised their variable home loan rates</a>, after the introduction of tougher new capital requirements designed to act as a buffer in case of financial crisis. The new prudential regulations followed the <a href="http://fsi.gov.au/">Murray report</a> into the financial system.</p>
<p>Australia’s estimated seasonally adjusted <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/mediareleasesbyReleaseDate/46DFE12FCDB783D9CA256B740082AA6C?OpenDocument">unemployment rate</a> for September 2015 sits at 6.2%. The RBA said today that there had been “stronger growth in employment and a steady rate of unemployment.”</p>
<p>The RBA said inflation is low and should remain so, forecasting it to be “consistent with the target over the next one to two years, but a little lower than earlier expected.”</p>
<p>We asked experts to respond to the RBA decision.</p>
<p><strong>Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National University:</strong></p>
<p>This is the right decision. There are signs of weakness in the economy and financial conditions have changed, with the four big banks raising their home loan rates and global financial markets remaining nervous, but there’s not enough there to lower rates further. They are already very low by historical standards. </p>
<p>Inflation is low, that’s true – but a number of the CAMA Shadow Board members are still concerned about easy money and the danger of fuelling asset prices bubbles. I think several Shadow board members would not be unhappy about the banks recently increasing the mortgage rate.</p>
<p>Moreover, this year has witnessed a dramatic fall in energy prices, which would have exerted downward pressure on prices, albeit only temporarily. At this stage it is not clear to what extent lower inflation is supply-side or demand-side driven.</p>
<p>Monetary policy has been expansionary for a long time and this is helping to rebalance the Australian economy, away from the resource sector to manufacturing and the service sector. Whatever slack is left in the system is probably best left to other policy measures, like fiscal and micro-economic policy. </p>
<p>Today’s decision will probably not affect the gap between the official cash rate and the big four rates. When the banks lifted their mortgage rates, they presumably did not do this in anticipation of the RBA changing policy. It would have been interesting had the RBA dropped rates – would the banks have reversed their recent rate increase? Probably not. I cannot judge whether the additional regulatory measures imposed on the banks exactly justify the increase in their home loan rates. No doubt these measures were also a welcome excuse for the banks to squeeze a little but of extra profit margin for their shareholders.</p>
<p>Recent events have confirmed that the RBA is not the only institution assigned with macroprudential objectives. There’s been a vigorous debate, both in policy and academic circles, about whether central banks should be concerned with asset price inflation and excessive credit growth and whether they should use interest rates to prevent asset price price bubbles from becoming too large. It is reassuring to see the <a href="http://www.apra.gov.au/Pages/default.aspx">Australian Prudential Regulation Authority</a> taking its role seriously and assuming responsibility. </p>
<p><strong>Guay Lim, Professorial Fellow, University of Melbourne</strong></p>
<p>I support and agree with the no-change, wait-and-see decision. I have concerns that further cuts will fuel asset prices with little effect on real spending. </p>
<p>In coming weeks, we will probably better understand what’s happening with fiscal policy and what’s happening with the US rate.</p>
<p><strong>Richard Holden, Professor of Economics, UNSW Australia</strong></p>
<p>The RBA’s announcement following their decision to keep the cash rate on hold at 2% had a fair bit of hedging language including:</p>
<blockquote>
<p>Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.</p>
</blockquote>
<p>So, basically, the RBA will cut rates down the track if it decides to cut rates down the track. Got it!</p>
<p>The big four banks are unlikely to further change mortgage rates in response, having already hiked recently in response to heightened capital requirements, but a cut in the months ahead by the RBA still looks like a definite possibility.</p><img src="https://counter.theconversation.com/content/50124/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><p class="fine-print"><em><span>Guay Lim has received funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The Reserve Bank of Australia has decided to leave the official cash rate unchanged at a record low of 2%, but said there was scope for a rate cut down the line.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityGuay Lim, Professorial Fellow, The University of MelbourneRichard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/485882015-10-05T22:00:55Z2015-10-05T22:00:55ZMarket jitters and weak global outlook means rates should hold<p>A weakening outlook for the global economy and jittery financial markets do not portend well for the Australian economy. With latest estimates of inflation at 1.5%, below the Reserve Bank of Australia’s target band of 2-3%, and delayed action in raising interest rates by the US Federal Reserve, the CAMA RBA Shadow Board on balance prefers to keep the cash rate on hold, attaching a 72% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 14%, up five percentage points from the previous month, while the confidence in a required rate hike is unchanged at 14%.</p>
<p>Australia’s unemployment rate edged down to 6.2% in August, according to the Australian Bureau of Statistics, although the increase in monthly employment fell by more than half compared to July and the participation rate fell to a modest 65%. No new data on wage growth was released.</p>
<p>The Australian dollar’s decline continued to just below US70¢, making Australia’s exports even more competitive. Yields on Australian 10-year government bonds have fallen further to 2.62%, which is very low by historical standards.</p>
<p>The Australian property market is still looking strong, with the construction PMI surging to 53.8 in August, from 47.1 in July. However, in the same month building permits have fallen by nearly 7%. The local stock market has been suffering considerable losses, the S&P/ASX200 closing below 5000 earlier this week. With heightened uncertainty affecting global capital markets, it is unlikely domestic share prices will rebound significantly.</p>
<p>Data on the international economy has weakened. The US Federal Reserve has delayed the highly anticipated increase in the federal funds rate, citing low inflationary pressure and fragile capital markets. Delayed action by the Federal Reserve is likely to reduce the pressure to increase the domestic cash rate. In Europe, attention has shifted from the Greek debt crisis to the unabating refugee crisis. China’s economy continues to slow, with its manufacturing sector contracting for the second month in a row. </p>
<p>Many experts are now expecting China’s GDP growth to fall to 6%. Global capital markets continue to pose threats. According to the Institute for International Finance, net capital outflows for the world’s emerging markets will be negative this year, the first time since 1988, pointing to weak growth in the region. Commodity prices remain subdued.</p>
<p>Consumer and producer sentiment measures paint a motley picture. The Westpac/Melbourne Institute Consumer Sentiment Index fell back to 93.9 in September, from 99.5 in August. Business confidence, according to the NAB business survey slid further, from 10 in July to 4 in August and now 1, at the same time as the AIG manufacturing and services indices, both considered leading economic indicators, continued to improve slightly.</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% equals 72% (down from 77% in September). The confidence that a rate cut is appropriate has edged up a further five percentage points from the previous month, to 14%; conversely, the confidence that a rate increase, to 2.25% or higher, is called for is unchanged at 14%.</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 25% (27% in September). The estimated need for an interest rate increase lies at 62% (65% in September), while the need for a rate decrease is estimated at 13% (8% in September). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 68% (six percentage points down from September), in a required cash rate decrease 14% (9% in September) and in a required hold of the cash rate 18% (unchanged).</p>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
<p><strong>“Economic activity is gaining momentum.”</strong></p>
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<p>The fall in the Australian dollar in recent months means that financial conditions have loosened noticeably. There is increasing evidence that the lower currency is working to support growth. Services exports are picking up, which combined with the
ongoing upswing in housing activity, is lifting business conditions and jobs growth. Although GDP is growing at a below trend pace, the broader collection of activity indicators suggests that economic activity is gaining momentum, supported by very loose financial conditions. I recommend that the cash rate is left unchanged this month and expect that the cash rate is more likely to
need to rise from here than fall, although not for some time yet.</p>
<hr>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Address weak economic fundamentals through reform rather than monetary policy.”</strong></p>
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<p>Despite recent suggestions that the RBA should cut, it would appear unwise to do so in a world where the Fed is now very likely to raise at its next meeting. While Australia’s economic fundamentals are weak, issues are more properly addressed through tax, competitiveness and other reforms than through further loosening already loose monetary policy. Issues with excessive debt remain significant in many economies, and Australia ought not to exacerbate potential problems on that front through cutting rates. The medium term question is still how rates become normalised as at least some other advanced economies raise rates.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“The RBA can probably wait until US liftoff.”</strong></p>
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<p>Despite the collapse of commodity prices and the effects of this on the stock market, the Australian economy has adjusted to the post-mining boom era reasonably well. This has been helped by the previous cuts in the policy rate and will continue to be supported by a weak Australian dollar. But the low interest rates also have risks in terms of large price swings in the housing market and excessive credit growth. Given all of this, the RBA should not lower the policy rate further. At the same time, the RBA can probably wait until US liftoff and more solid indications of inflationary pressures to start raising rates.</p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“There is a significant risk of escalating market pessimism.”</strong></p>
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<p>The US Federal Reserve did not change the target federal funds rate in September, given the sluggish world economy and fragile financial markets. These concerns will remain probably through to 2016. With input prices falling, inflation is unlikely to be an issue anywhere in the rich world for the forseeable future, and so there is no reason to act pre-emptively. Many central banks have cut interest rates in the last year including Australia, Canada, China, Denmark, Euro area, India, Israel, New Zealand, Norway, Russia, South Korea, Sweden and Switzerland. The time to change course is a way off, and in particular for Australia.</p>
<p>There are few indications of how potential GDP growth in Australia might go above the current 2%. A surge in China’s imports from Australia is unlikely. The new treasurer Scott Morrison appears likely to consolidate government expenditure. Business investment is still in retreat. </p>
<p>While some worry about a possible bubble in property prices, the <a href="http://www.rba.gov.au/publications/bulletin/2015/sep/pdf/bu-0915.pdf">September 2015 RBA Bulletin</a> shows that there has been and remains significant structural excess demand for housing services in Australia, which is even more pronounced in NSW. The recent APRA-induced credit market tightening may have little effect on this structural excess demand, and may well dim one of the few bright lights in the economy - dwelling construction. </p>
<p>There is a significant risk of escalating market pessimism, which would be stoked by tightening monetary policy. For all these reasons, my recommendation has an increased weight on an interest rate cut, though no change still dominates for the October meeting.</p><img src="https://counter.theconversation.com/content/48588/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>Gloomy portents for the Australian economy suggest interest rates should continue where they are, say the economists shadowing the Reserve Bank.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/468042015-08-31T20:07:40Z2015-08-31T20:07:40ZTrouble looms, so rates should hold<p>Wild swings in global stock markets have made investors edgy, the economic news coming out of China is not favourable and domestic private investment has plummeted. On the other hand, US growth surged to 3.7% annually and fears of a debt crisis in the Euro zone have abated. Latest estimates still put inflation at 1.5%, below the Reserve Bank of Australia’s target band of 2-3%. </p>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level of 2% equals 77% (up from 68% in August). The confidence that a rate cut is appropriate has edged up three percentage points, to 9%; conversely, the confidence that a rate increase, to 2.25% or higher, is called for, has decreased considerably for the third time in a row, from 35% in July and 25% in August to 14%.</p>
<p>Latest figures show that Australia’s unemployment rate increased to 6.3% in July, according to the Australian Bureau of Statistics, even though total employment rose by nearly 40,000 in July. Nominal wage growth remains muted at 2.3% and is forecast to remain low in the next quarter.</p>
<p>The Aussie dollar depreciated further against major currencies. It now fetches less than 72 US¢. Yields on Australian 10-year government bonds remain low at 2.71%.</p>
<p>As already pointed out in last month’s statement, the Australian property market appears to be cooling and the local sharemarket is retreating further from its highs earlier this year. </p>
<p>The elephant about to enter the room is the dramatic fall in new private capital expenditure, equalling a sizable 4.0% in the June quarter, bringing the annual decline to 10.5%, the largest drop since the last recession in 1992. The large drop is largely attributable to the contraction of the mining sector; however, firms in other sectors are also planning to cut spending, posing a serious threat to the Australian economy.</p>
<p>The recent gyrations in worldwide stock markets have highlighted the frothiness in global asset prices. To what extent volatility and uncertainty in asset markets spills over into the real economy is, of course, unclear. However, few economists doubt that asset markets are relying on ultra-low interest rates to persist. Concerns about any debt crisis in the Euro zone have waned since the recent 80 billion Euro credit extended to Greece. </p>
<p>As in previous months, the deteriorating outlook for the Chinese economy pose the biggest immediate threat to Australia’s export markets and thus to Australia’s GDP. US growth, on the other hand, has been revised up to 3.7% (annualized) for the second quarter 2015, presenting a dilemma for the Federal Reserve Bank: the strong economic performance suggests an increase in the federal funds rate is around the corner but if volatility in stock markets persists, signalling heightened uncertainty about the future, the Fed may be tempted to postpone the interest rate increase. Commodity prices have continued to fall, with crude oil dipping below $40 a barrel.</p>
<p>Also of concern is the sizable contraction of world trade in the first half of this year. The volume of global trade shrank by 0.5% in the June quarter, while the figures for the March quarter were revised to a 1.5% contraction, indicating that world trade recorded its largest contraction since the 2008 global financial crisis.</p>
<p>Consumer and producer sentiment measures paint a motley picture. The Westpac/Melbourne Institute Consumer Sentiment Index jumped from 92.3 in July to 99.5 in August. Business confidence, according to the NAB business survey slumped from 10 in July to 4 in August, at the same time as the AIG manufacturing and services indices, both considered leading economic indicators, recorded notable improvements.</p>
<h2>What the Shadow Board believes</h2>
<p>The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2% equals 27% (23% in August). The estimated need for an interest rate increase lies at 65% (73% in August), while the need for a rate decrease is estimated at 8% (4% in August). </p>
<p>A year out, the Shadow Board members’ confidence in a required cash rate increase equals 72% (six percentage down from August), in a required cash rate decrease 9% (7% in August) and in a required hold of the cash rate 18% (up from 15% in August).</p>
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<img alt="" src="https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93261/original/image-20150828-17454-13vh8kh.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>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93260/original/image-20150828-17476-v3w0wx.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>
</figcaption>
</figure>
<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“The longer term outlook is still uncertain.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93250/original/image-20150828-17468-1c0s10e.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/93249/original/image-20150828-17460-i8imt2.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93249/original/image-20150828-17460-i8imt2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93249/original/image-20150828-17460-i8imt2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93249/original/image-20150828-17460-i8imt2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93249/original/image-20150828-17460-i8imt2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93249/original/image-20150828-17460-i8imt2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93249/original/image-20150828-17460-i8imt2.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/93248/original/image-20150828-17463-9pawb7.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93248/original/image-20150828-17463-9pawb7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93248/original/image-20150828-17463-9pawb7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93248/original/image-20150828-17463-9pawb7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93248/original/image-20150828-17463-9pawb7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93248/original/image-20150828-17463-9pawb7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93248/original/image-20150828-17463-9pawb7.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>Recent global gyrations should make the RBA hold rates this month, and with a recovery in equity markets outside of China there seems little reason to cut rates. The longer term outlook is still uncertain, with global trade falls the most recent worrying data in the global economy and far more consequential than falls in Chinese equity markets.</p>
<hr>
<p>Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute:</p>
<p><strong>“International interest rates are likely to rise.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93253/original/image-20150828-17460-robect.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&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/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93252/original/image-20150828-17471-ekokqg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&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/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93251/original/image-20150828-17450-6usgmq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&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>International interest rates are likely to rise, as growth and employment in the US appear to be stabilising at normal rates. While Australian asset markets are expected to continue to be volatile, the exchange rate is expected to remain low. Keeping the official rate steady at 2% would help offset some of the negative effects of uncertainty in the international environment on the domestic economy – as well keep the policy rate well above the zero lower bound.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“The RBA should not provide a ‘Greenspan put’.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93256/original/image-20150828-17454-1qypplw.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/93255/original/image-20150828-17463-jz5hq6.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93255/original/image-20150828-17463-jz5hq6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93255/original/image-20150828-17463-jz5hq6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93255/original/image-20150828-17463-jz5hq6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93255/original/image-20150828-17463-jz5hq6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93255/original/image-20150828-17463-jz5hq6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93255/original/image-20150828-17463-jz5hq6.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/93254/original/image-20150828-17435-1oxf91b.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93254/original/image-20150828-17435-1oxf91b.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93254/original/image-20150828-17435-1oxf91b.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93254/original/image-20150828-17435-1oxf91b.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93254/original/image-20150828-17435-1oxf91b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93254/original/image-20150828-17435-1oxf91b.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93254/original/image-20150828-17435-1oxf91b.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>Given the recent turbulence in financial markets and underlying inflation being at the low end of the target range, the RBA should hold its policy rate steady rather than raise it. But with a stable real economy, an overheated housing market, and a low dollar stimulating the foreign sector, the RBA should not provide a “Greenspan put” by cutting rates in response to the stock market. Instead, it should carefully monitor conditions to determine when it will need to start raising the policy rate back towards its neutral level.</p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“Monetary policy needs to avoid reversing recent currency falls.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93259/original/image-20150828-17476-kssdfh.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/93258/original/image-20150828-17468-ffq7q4.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/93258/original/image-20150828-17468-ffq7q4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93258/original/image-20150828-17468-ffq7q4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93258/original/image-20150828-17468-ffq7q4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93258/original/image-20150828-17468-ffq7q4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93258/original/image-20150828-17468-ffq7q4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93258/original/image-20150828-17468-ffq7q4.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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<p>The current fragility in global stock markets appears to be more of a dash to liquidity than to value. It is likely an over-reaction to expected future interest rate increases, beginning with the federal funds rate perhaps this year. Nevertheless some downward adjustment was probably necessary because the boom in global stock prices generally did not mirror the sluggish recovery in the
global real economy. </p>
<p>The trade-weighted Australian dollar has fallen about 15% in the last year, and fortunately has not risen with the recent competitive depreciations across Asia. Monetary policy needs to avoid reversing this contributor to Australia’s improved export competitiveness. In the current volatile financial environment, the RBA should maintain the current cash rate in September, though I have modestly increased the probability of a desirable cut.</p>
<hr><img src="https://counter.theconversation.com/content/46804/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>The best course of action for the Reserve Bank is to hold off changing rates; but the longer term case for an increase is changing.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442392015-07-06T00:27:01Z2015-07-06T00:27:01ZGrexit fear aside, interest rates should hold: 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>
<hr>
<p>In Greece the economic tragedy appears to be in its final act, while dramatic falls in the Chinese stock market highlight the weaknesses of its economy. Domestic economic data is mixed: unemployment has fallen slightly but consumer and producer confidence have weakened. Inflation remains comfortably within the RBA’s target band. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm. While it attaches only a small probability to the need for a rate cut, this probability has increased from the previous month. In particular, the Shadow Board recommends the cash rate be held at its current level of 2%; it attaches a 57% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 8%, up from 2% in the previous month, while the confidence in a required rate hike stands at 35%.</p>
<p>Australia’s jobless rate, according to the Australian Bureau of Statistics, fell to 6% in May. Encouragingly, in the same month full-time employment and total employment have increased significantly while the participation rate is virtually unchanged. No new data has been released on wage growth, which recently has been at a record low of 2.3% per quarter.</p>
<p>The Aussie dollar keeps hovering around the 76 US¢ mark. Yields on Australian 10-year government bonds have continued to rise, now equalling 3.02%, implying a further steepening of the yield curve, normally an indication that the economy is improving.</p>
<p>The S&P/ASX 200 stock market index has retreated from its all-time high in April, taking some of the froth out of the market. High real estate prices, which carry the risk of misallocated investment and a costly price correction, remain a concern for many Shadow Board members and are often cited for a reason not to cut the cash rate any further.</p>
<p>Overseas, the Greek debt crisis and the faltering Chinese economy give cause for concern. While Australia’s direct exposure to the Greek economy is minimal, a complete breakdown of negotiations between Greece and the European Union, followed by a Greek exit from the Euro, may have noticeable ramifications for global financial markets. </p>
<p>Of greater concern is China, Australia’s largest trading partner, which grew by only 7% in the first quarter of this year, its weakest performance in six years. Some analysts, taking into account the recent tumble of the Chinese stock market and weak gauges of factory activity, entertain the possibility of a further slowing of the Chinese economy. Meanwhile, the US economy is looking more promising, but continued turmoil in the international economy will likely delay the long-awaited increase of the federal funds rate by the Federal Reserve Bank. Commodity prices are likely to remain soft and possibly fall further.</p>
<p>Consumer and producer confidence remain volatile and moderately weak. The AIG Manufacturing Index decreased from 52.29 in May 2015 to 44.20 in June, while the Westpac/Melbourne Institute Consumer Sentiment Index fell from 102.40 in May 2015 to 95.30 in June. The AIG Services Index increased slightly from 49.60 in May 2015 to 51.20 in June. These sentiment numbers are reflected in weak capital expenditure and weak consumer spending.</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 57% (down from 60% in June). The confidence that a rate cut is appropriate has increased from 2% in June to 8%; conversely, the confidence that a rate increase, to 2.25% or higher, is called for has decreased from 38% in June to 35%.</p>
<p>The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2% equals 24% (23% in June). The estimated need for an interest rate increase lies at 69% (76% in June), while the need for a rate decrease is estimated at 6% (3% in June). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 77% (down from 81% in June), in a required cash rate decrease 4% (2% in June) and in a required hold of the cash rate 19% (up from 17% in June).</p>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
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<p>Having delivered 50bp of cuts in the first half there is no need to consider cutting rates again this month, particularly given recent signs that the labour market is improving. At the same time, activity in the Sydney and Melbourne housing markets continues apace, with the Sydney market, in particular, showing signs of worrisome exuberance. Although a lower AUD could help to speed up the re-balancing of growth, it is not clear that the domestic cash rate setting is having much influence on the currency. What is clear, is that further rate cuts risk over-inflating the housing market. In my view, the costs associated with cutting the cash rate further outweigh the benefits that lower rates could deliver in terms of supporting sustainable growth.</p>
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<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
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<p><strong>“If there is Grexit…the RBA might reasonably cut to calm nerves.”</strong></p>
<p>In this case more than ever events in the rest of the world right up until the Board makes its decision are likely to influence the outcome. If there is Grexit then the likely ramifications for European and global economies are small, but we really can’t know. If that were to occur then the RBA might reasonably cut to calm nerves. However in the more likely event that the Europeans kick the can down the road again, sitting on their hands seems the optimal decision to make.</p>
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<p>Bob Gregory, Professor of Economics at Australian National University:</p>
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<p>I am really of the view that what we gain from lower interest rates is not worth the loss in increasing house prices.</p>
<hr>
<p>Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute:</p>
<p><strong>“Consumers remain worried about future conditions.”</strong></p>
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<p>There are signs that the economy is doing ‘alright’ – GDP growth was a strong 0.9 per cent in the March quarter of 2015, the trimmed mean measure of inflation was 2.3 per cent (2014:Q1-2015:Q1) and the unemployment rate dropped to 6.0 per cent in May 2015 (from a revised 6.1 percent in April). Unfortunately, there is no convincing evidence of momentum from forward-looking indicators. Neither the Westpac-MI Leading Index of Activity nor the Index of Unemployment Expectations are signaling steady improvements in activity. Consumers remain worried about future conditions; specifically, the Expectations component of the consumer sentiment index has been below the neutral mark of 100 since December 2013. On balance, it seems prudent to keep the cash rate steady for a while. This is especially important, considering the possibility of global “uncertainty” impacting negatively on the Australian economy. In the absence of action from the fiscal arm of policy, we may need the monetary arm to act quickly and decisively.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“Given the economic turmoil in Europe, this is definitely not the moment to start raising rates.”</strong></p>
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<p>With underlying inflation well within the RBA’s target range at 2.3 percent and the latest unemployment rate easing slightly down to 6.0 percent, the RBA should hold its policy rate steady, with a bias towards raising it in the future to return interest rates back to more neutral levels. Given the economic turmoil in Europe, this is definitely not the moment to start raising rates. It is true that Greece has little direct effect on Australia. But there are many implications for the position of other larger economies within the Eurozone if Greece were to exit. In any event, this turmoil could delay liftoff for the US interest rates, which will put upward pressure on the Australian dollar. Therefore, in the absence of domestic inflation pressures, the RBA should not raise rates until the European turmoil and the timing of liftoff for US interest rates is resolved.</p><img src="https://counter.theconversation.com/content/44239/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>China’s slowing economy is a greater concern than the Greek crisis, but booming property prices mean the RBA should hold firm.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/381692015-03-02T04:17:11Z2015-03-02T04:17:11ZLabour market weakens, but RBA Shadow Board recommends against further rate cut<figure><img src="https://images.theconversation.com/files/73418/original/image-20150302-16188-1tnqhpg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's labour market is weakening, but the Shadow Board recommends no change to the cash rate. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/thamirainbow/16004072511/in/photolist-qoe4bF-qMUYig-pR55Nf-qCfdJk-raKvjg-6XjXvG-e8qgix-e8qfF8-puRXcG-pxGW1S-pM5adD-qtxBGx-qbaXXc-p6G6sF-peAi9H-pTN2Ao-9vTcMp-6pHSRJ-4h1cB5-6rEyW1-4yqRGW-9X1e5-6xfFqJ-c2G8w-aFnXju-6rF7ET-ahjewq-aTyitM-qReAox-58Liw7-6P34yq-8pGUug-dcv4yD-vYpWC-7vpcjf-7zbTSN-9c175w-pB9c49-8cfs7u-6XcATV-7Ytz9q-8DMmFM-4tm8rb-bpdXWV-MoVF-8D91WE-5PRHWh-cco9m9-8g7mtR-9nZGem">Flickr/Thami César</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>The <a href="https://cama.crawford.anu.edu.au/rba-shadow-board">CAMA RBA Shadow Board</a> 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>
<hr>
<p>Last month, the Reserve Bank of Australia surprised many by lowering the cash rate from 2.5% to 2.25%, pointing to a likely fall in economic growth over the next 12 months – around 2.25%, well below trend of 3%. Some analysts are calling for another cut tomorrow.</p>
<p>(The RBA Shadow Board had on balance recommended <a href="https://theconversation.com/interest-rates-decision-could-boil-down-to-oil-rba-shadow-board-37037">a policy of no change</a>. Read a further explanation by Shadow Board member and UNSW Australia Business School Professor James Morley <a href="https://theconversation.com/the-rba-cut-rates-we-said-it-shouldnt-heres-why-37666">here</a>.) </p>
<p>Weak labour market data confirms the soft economic outlook, and financial markets are anticipating another possible rate cut during the next few months. The CAMA RBA Shadow Board, however, on balance prefers to hold rates and still considers it necessary that the cash rate is lifted in six-12 months. </p>
<p>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 14%, while the confidence in a required rate hike stands at 22%.</p>
<p>Recent labour market data underline the cracks in the Australian economy: according to the Australian Bureau of Statistics the unemployment rate jumped to 6.4%, its highest since 2002. The seasonally adjusted labour force participation rate remained at 64.8% but wage growth is weak, 2.5% in nominal terms. Stagnant real wages will put the brakes on consumer spending and make it less likely that GDP growth ticks up again.</p>
<p>The fall of the Aussie dollar has halted at around 78 US¢. There are clear signs the weaker dollar is helping the domestic economy. However, the danger is that Australia is becoming embroiled in the global currency war, whereby countries loosen monetary policy in an attempt to gain international competitiveness. </p>
<p>While feasible for countries individually, collectively the world as a whole cannot devalue (exchange rates are relative prices, not absolute prices), and consequently the world economy becomes inundated with liquidity, leading to all sorts of false price signals and economic dislocations. Such concerns underlie the scepticism towards further rate cuts.</p>
<p>Confidence measures remained mixed. Consumer confidence bounced back in February, with the Westpac Consumer Sentiment Index coming in at 100.70 this month (93.2 in the previous month). Business confidence measures remain largely unchanged, but the most recent estimate of capacity utilisation dropped from 80.53% in December to 79.96% in January. As the economy is rebalancing and trying to come to terms with the many domestic and international uncertainties, consumer and business confidence measures will continue to lack clear direction.</p>
<p>The picture for the global economy looks much the same as in the previous month: Europe is weak while working through a plan to restructure Greek debt, China is steadying, while the US economy remains the only relative highlight in the world economy.</p>
<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at its current level of 2.25% equals 64%. There is little confidence (only 14%) that another rate cut is appropriate whereas the Shadow Board considers it more likely (22%) that a rate hike, 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%. The estimated need for an interest rate increase lies at 56%, while the need for a rate decrease is estimated at 13%. A year out, the Shadow Board members’ confidence in a required cash rate increase equals 63%, in a required cash rate decrease 12% and in a required hold of the cash rate 26%.</p>
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<img alt="" src="https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73395/original/image-20150302-16172-4vux6y.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">
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<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73397/original/image-20150302-16185-112ii66.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>
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</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73396/original/image-20150302-16157-7mpd07.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>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73403/original/image-20150302-16163-1mthovw.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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<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73402/original/image-20150302-16182-12nndmc.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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</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73401/original/image-20150302-16185-1wjhvf9.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><strong>“The RBA could use up all its ammunition.”</strong></p>
<p>Having unexpectedly cut last month, it would seem to make sense to hold and wait before moving again. International developments remain uncertain but are stable, and I have a concern that the RBA is using up all of its ammunition before it
becomes absolutely necessary.</p>
<p>At longer horizons it still seems likely that raising to more neutral levels rather than cutting rates would seem desirable.</p>
<hr>
<p>Bob Gregory, Professor of Economics at Australian National University:</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73405/original/image-20150302-16188-8dzguj.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">
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</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73406/original/image-20150302-16172-197rcfm.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">
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</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73404/original/image-20150302-16160-15tliwf.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>I did not support the interest rate change last month. Still worried about housing and think we gain very little else from a cut.</p>
<hr>
<p>Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute of Applied Economic and Social Research at University of Melbourne:</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73409/original/image-20150302-16157-196pwjp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73407/original/image-20150302-16172-tv5kb6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&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/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73408/original/image-20150302-16175-gh1jx2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<p><strong>“It’s unclear that further cuts would stimulate real spending.”</strong></p>
<p>It would be difficult to make the case for another cut in the cash rate following so soon after the cut last month. This is not to detract from real concerns that growth remains below trend, but one reason for pause is that it is unclear that further cuts would stimulate real spending.</p>
<p>This is not the appropriate forum to discuss economic research, but it is apposite to note that the relationship between spending (in real terms) and the cash rate appeared to have changed post-global financial crisis. From 1993-2007, lowering the cash rate appeared to have had the desired effect of stimulating growth in real GNE, but post GFC, the evidence is not so apparent.</p>
<p>Unless there are clear signals of worsening economic conditions, it seems prudent to keep rates steady rather than risk fuelling asset-price inflation. And there are signs of improvement! The US economy is recovering steadily and growth in China, though slower, is still robust. Meanwhile, the exchange rate has depreciated and consumer confidence has picked up.</p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<figure class="align-right ">
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<p><strong>“In the absence of a fiscal response, monetary policy carries the burden.”</strong></p>
<p>The Australian economy continues with below-normal activity. There is little on the horizon that might restore normality: the
labour market weakened in January with the unemployment rate reaching 6.4% and wage rises showing moderation at 2.7%;
planned capital expenditures are showing significant declines, particularly in mining and manufacturing; the TWI appreciated by
3% in February despite continued weakening in commodity prices; and the weighted growth of Australia’s major.trading
partners remained modest. </p>
<p>The main downside risk to a further easing of monetary policy is asset price inflation, but this is not
an obvious problem at this stage - for example only Sydney and Melbourne housing prices are growing much faster than
Australia’s 5%.</p>
<p>The RBA Board judged the evident weaknesses last month to merit a relaxation of monetary policy, and the data releases this
month give further support to that judgment. In the apparent absence of a cogent fiscal response, monetary policy needs to
carry an even bigger burden for the time being.</p>
<hr><img src="https://counter.theconversation.com/content/38169/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>Weak labour market data has confirmed a soft economic outlook, but our Shadow Board experts believe a rate cut isn’t the answer.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/376662015-02-19T02:35:00Z2015-02-19T02:35:00ZThe RBA cut rates, we said it shouldn’t. Here’s why.<figure><img src="https://images.theconversation.com/files/72322/original/image-20150218-19478-o6weth.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Shadow RBA Board recommends what the RBA should do, not predicts what it will do.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>I am a member of the <a href="https://cama.crawford.anu.edu.au/pro-pol/">“Shadow” RBA Board</a>, which is made up of a collection of industry and academic economists. Just before every meeting of the real-world RBA Board, we announce our recommendations for monetary policy. </p>
<p>Prior to the February meeting, we argued that <a href="https://theconversation.com/interest-rates-decision-could-boil-down-to-oil-rba-shadow-board-37037">RBA board members should hold the policy rate steady at 2.5%</a>. But they cut the rate for the first time in 18 months to 2.25%. This was a surprise to many, including financial markets which responded with big gyrations in the dollar and equity prices.</p>
<p>So did we, like many others, simply get it wrong?</p>
<p>Not really, because a key distinction between the Shadow Board and many market commentators is that we are supposed to recommend what the RBA <em>should</em> do, not predict what it <em>will</em> do. </p>
<p>Of course we hope that the reasons behind our recommendation are so compelling that the RBA would come to the same conclusion, even if it does not directly follow our advice. So this distinction between <em>what it should do</em> and <em>what it will do</em> gets blurred somewhat in practice.</p>
<h2>Was the RBA wrong to cut rates?</h2>
<p>What to make of the RBA cut then? Did it make a mistake?</p>
<p>The short answer is “not exactly”. (I know, you’re thinking that’s a typical <a href="http://quotationsbook.com/quote/11809/">two-handed economist</a> answer to a simple question. But I will explain.)</p>
<p>In <a href="https://cama.crawford.anu.edu.au/sites/default/files/outcome/attachments/2015-01/shadow_board_comments_february2015.pdf">my recommendation</a> not to cut, I focused on the huge recent drop in oil prices. I argued that this contributed to a temporary decline in inflation below the RBA’s target range of 2-3%, with the latest CPI annual rate at 1.7%. I acknowledged that low inflation provided some scope for the RBA to cut rates. But I suggested that the fall in oil prices, along with the fall in the dollar and robust growth in the US, would help broaden growth beyond interest-rate-sensitive sectors such as the housing market. So a cut could be delayed until the RBA had better prepared financial markets for one.</p>
<p>In the <a href="http://www.rba.gov.au/media-releases/2015/mr-15-01.html">policy statement</a> and the subsequently released <a href="http://www.rba.gov.au/monetary-policy/rba-board-minutes/2015/2015-02-03.html">minutes</a> from its February meeting, the RBA actually covered a lot of similar ground, albeit in much more detail.</p>
<p>The big difference was the RBA emphasised that the unemployment rate would, according to its forecasts, peak at a higher level than previously thought. This change in the forecast was driven in part by revisions of GDP data which suggested weaker growth over the past year. </p>
<p>Given this new information and the RBA’s modelling of how it changes the forecast for the unemployment rate, an immediate cut in the policy rate was deemed to be the best course of action. Its concerns were subsequently confirmed by the latest unemployment rate data that showed a jump up to 6.4% in January, the highest rate in more than 12 years. </p>
<p>So the RBA looks prescient. At the same time, trying to prop up demand in a way that stimulates the housing market has its risks. The US experience in the early 2000s makes this abundantly clear. Ultimately, we won’t know whether the RBA made the right call for years, if ever. </p>
<h2>Known unknowns</h2>
<p>The last Shadow Board recommendation wasn’t actually as simple as saying the RBA should hold rates steady. In general, we acknowledge uncertainty about the appropriate level for the policy rate by assigning probabilities to different possibilities. Think of this as like placing bets on what the right thing to do is.</p>
<p>Averaging across all of our members, we assigned a 68% probability that the appropriate policy was to hold steady, with a 13% probability for a cut and a 19% probability for a rise. </p>
<p>Importantly, we assign individual probabilities without conferring first. This is designed to avoid “group think” and there is a fair amount of variation in recommendations across members. (In February, I assigned 65% to holding steady, 20% to a cut, and 15% to a rise, which wasn’t too far off the average probabilities. The reasons for these probabilities can be discerned from my current and <a href="https://cama.crawford.anu.edu.au/rba-shadow-board/past-outcomes">past written comments</a>.)</p>
<h2>Not trying to sell newspapers</h2>
<p>Unfortunately for those who might enjoy a little controversy, we’re not in this to criticise the RBA.</p>
<p>This is in contrast to the original <a href="http://en.wikipedia.org/wiki/Shadow_Open_Market_Committee">“Shadow” Fed</a> in the US, which was founded in the 1970s. It was quite critical of the Federal Reserve’s policy at the time, not just in terms of policy actions, but its whole policy framework.</p>
<p>Monetary policy has changed a lot since the 1970s, with the adaption throughout much of the world of the remarkably successful Kiwi export of <a href="http://en.wikipedia.org/wiki/Inflation_targeting">inflation targeting</a>. This policy framework emphasises transparency and a nominal anchor (i.e., stable CPI inflation) that stands in stark contrast to the secretive and scattershot policies that were carried out in the 1970s.</p>
<p>The RBA has an inflation target and it is guided in its policy actions by forecasts of inflation and the unemployment rate. It explains in a transparent way why the policy rate is set at a given level, including how it will bring inflation within its 2-3% target range.</p>
<p>This framework has allowed the RBA to achieve very close to 2.5% inflation on average since the introduction of inflation targeting in 1994. So it is hard to be critical of the policy framework.</p>
<h2>The Shadow Board, what is it good for?</h2>
<p>So what is the Shadow Board’s role then? I believe one answer is to provide some independent thought on monetary policy, including why it can sometimes make sense to raise rates, rather than cut them. </p>
<p>I’ve noticed a fairly unremitting enthusiasm in the financial press for rate cuts. And these do stimulate the economy, so why not? The answer, of course, is that these rate cuts can also lead to inflation and various imbalances that create long-run pain after the short-run gain.</p>
<p>At the same time, we need to avoid what Paul Krugman refers to as VSP (“very serious people”) Syndrome, which leads to a constant and highly irresponsible call for short-run pain to somehow prove our economic virtue. Despite such economic bloodletting being equally as bad as the long-discredited medical version, VSPs keep pushing their <a href="http://www.afr.com/p/markets/australia_needs_recession_to_concentrate_W6pbeWWbdXJmpouyxXGvRM">shockingly bad advice</a> and sometimes even get to <a href="https://theconversation.com/crisis-envy-and-the-budget-a-very-serious-problem-26060">try it out with fiscal policy</a>. </p>
<p>Monetary policy will always involve dilemmas with no easy solutions. A record low policy rate of 2.25% helps the Australian economy adjust to the end of the mining boom. But it almost certainly overstimulates the housing market, which will cause problems down the road. </p>
<p>The Shadow Board won’t provide a definitive answer as to what the RBA should do. We are clear about our own doubts. But we try to think through the possibilities in an objective way and hope to contribute to the public discourse on monetary policy. </p>
<p>Just don’t ask us to predict what the RBA will do at the next meeting.</p><img src="https://counter.theconversation.com/content/37666/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Morley receives funding from the Australian Research Council.</span></em></p>I am a member of the “Shadow” RBA Board, which is made up of a collection of industry and academic economists. Just before every meeting of the real-world RBA Board, we announce our recommendations for…James Morley, Professor of Economics and Associate Dean (Research), UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/370372015-02-02T02:44:34Z2015-02-02T02:44:34ZInterest rates decision could boil down to oil: 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>
<hr>
<p>Gyrations in global financial markets make Australia’s economic outlook very uncertain. The US economy is expanding, whereas other regions are flirting with recession. Domestic growth remains slightly below trend and headline inflation is below the official target band of 2-3%. The collapse in oil prices, the weakened Aussie dollar and renewed doubt about the viability of the eurozone add uncertainty to the global economic outlook. </p>
<p>The CAMA RBA Shadow Board continues to recommend with confidence that the cash rate be held at its current level of 2.5%; the board attaches a 68% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 13%, while the confidence in a required rate hike has decreased to 19%.</p>
<p>According to the Australian Bureau of Statistics, headline inflation has fallen to 1.7%, below the official target band of 2-3%. Much of this can be attributed to the fall in energy prices. The implications of this are unclear, as the drop in oil prices is the result of reduced demand as well as increased supply. In the medium term the latter can be expected to be expansionary for the Australian economy. </p>
<p>Core inflation, a measure of inflation that excludes volatile items such as energy and food, currently lies at 2.1% – within the official inflation target band – and is a better gauge for setting interest rates. It suggests that the drop in energy prices does not call for an immediate reduction in the cash rate.</p>
<p>After an extended period of low volatility, during which the Australian dollar hovered around the 85 US¢ mark, the currency has fallen another 8 US¢. If the dollar remains below 80 US¢ for some time, exports, in particular the tourism and education sectors, should expand appreciably and boost domestic production.</p>
<p>Some slack remains in the Australian labour market, with the Australian Bureau of Statistics’ most recent estimate of the unemployment rate being 6.1%. The labour force participation rate has picked up a little to 64.72%, while the change in employment, at around 40,000 per month, has been solid for the past two months.</p>
<p>These figures suggest that the rebalancing of the Australian economy, away from the resources sector, is reaching the labour market. However, wages growth remains muted and a growing share of employment is part-time.</p>
<h2>Commodities and currencies volatile</h2>
<p>The key headlines during the past weeks have centred on events in financial markets. WTI crude oil has fallen from over US$100 a barrel to under US$45 a barrel in less than a year. Prices for other energy goods have fallen significantly also, as well as the price for iron ore. </p>
<p>Global currency markets were in turmoil when the Swiss National Bank unexpectedly abandoned its cheap Swiss Franc policy and let the currency float freely. The outcome of the Greek election once again places question marks over the viability of the eurozone as Greece will need to borrow additional funds to service its existing debt.</p>
<p>These uncertainties, along with promising signs coming from the US economy, have made global investors favour the US dollar. In trade-weighted terms the US dollar has appreciated approximately 10% during the past six months.</p>
<h2>Confidence subdued</h2>
<p>Consumer confidence remains subdued, with the Westpac Consumer Sentiment Index coming in at 93.2 this month (91.1 in the previous month, 98.47 six months ago). Capacity utilisation remains virtually unchanged at 80.48% in December, while the manufacturing PMI has fallen considerably (from 50.08 in November to 46.91 in December).</p>
<p>Conversely, the Services PMI jumped from 43.80 to 47.50 in December and the NAB monthly survey of business confidence remains weak at 2 (1 in November, 10 in August 2014). The Westpac-Melbourne Institute Leading Index of Economic Activity remained steady.</p>
<p>The outlook for the global economy remains uncertain, though attention has shifted from geopolitical factors to financial factors. Europe is still looking weak – the European Central Bank recently announced a large-scale sovereign bond purchasing program to avoid deflation and boost growth in the eurozone, and Germany is considering another Euro 20 billion bailout package for Greece. </p>
<p>No further economic impulses are to be expected from China, nor from Japan. The US economy is faring better but growth continues to be highly unequal. A sustained upturn in the US economy needs to rely on significant wages growth for the middle class.</p>
<p>The consensus to keep the cash rate at its current level of 2.5% slipped two percentage points to 68%. The probability attached to a required rate cut increased noticeably to 13% (5% in December) while the probability of a required rate hike has fallen to 19% (25% in December).</p>
<p>The probabilities at longer horizons are as follows: six months out, the probability that the cash rate should remain at 2.5% rose ten percentage points, to 46%. The estimated need for an interest rate increase plummeted to 38% (56% in December), while the need for a decrease rose to 16%. A year out, the Shadow Board members’ confidence in a required cash rate increase is down ten percentage points to 61%, the need for a decrease edged up to 11% (10% in December), while the probability for a rate hold is 29% (22% in December).</p>
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<h2>Comments from Shadow Reserve bank members</h2>
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<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
<p><strong>“In principle, the fall in oil prices should be a net positive for local growth.”</strong></p>
<p>Since the last board meeting there have been a number of global developments with local relevance. The most significant has been the continued dramatic fall in global oil prices, which are now 60% lower than in the middle of last year. </p>
<p>The fall in oil prices reflects both weaker global demand and a boost to supply. It is still too early to tell which of these forces is the most significant. Markets have generally interpreted the fall as at least partly due to weaker demand, with global bond yields falling, as inflation is expected to be lower.</p>
<p>Consumer price inflation is falling across many countries, with a number of central banks already responding by lowering interest rates. Europe has also seen significant financial developments in the past month, with the ECB beginning a sovereign bond purchasing programme, the Swiss abandoning their exchange-rate ceiling and the election of a new government in Greece once again raising concerns about the possibility of that country exiting the eurozone. This has generally seen a flight to quality assets, further pushing government bond yields lower in a number of countries.</p>
<p>For Australia, the economic indicators have continued to show signs that low interest rates are supporting a pick-up in activity. Housing prices and construction activity have continued to pick up and retail sales have been growing solidly. Surveys suggest business conditions have generally been trending higher, although business confidence remains weak. </p>
<p>Working in the other direction, mining investment is falling, although this is being largely offset by a ramp-up in resources exports, as new capacity comes on line. The net effect of these divergent forces on local demand is difficult to assess, but the solid underlying inflation numbers for the fourth quarter of 2014 (0.7% quarter-on-quarter) give some indication that demand is holding up. The 8% fall in the Australian dollar since the last board meeting should further help to support the rebalancing of growth and local demand.</p>
<p>The fall in oil prices, combined with the repeal of the carbon tax last year, has seen headline CPI inflation fall below the bottom edge of the target band (1.7%). As a result of lower petrol prices it is likely to fall further in Q1.</p>
<p>However, for the setting of monetary policy it is the outlook for underlying inflation and inflation expectations that matter most. In principle, the fall in oil prices should be a net positive for local growth, as Australia is a net petroleum importer, and lower petrol prices should boost household disposable incomes and business profits. </p>
<p>Although there is some scope to consider cutting the cash rate in the short run, as headline inflation will be lower than previously expected due to lower oil prices, it is the medium-term outlook for inflation that matters most. In the medium term, the effect of lower oil prices is somewhat ambiguous, but I view it as more likely to be an upside risk than downside risk to underlying inflation, as I expect the boost to demand from lower petrol prices to more than offset the negative impact on the domestic economy of lower oil prices on energy exporters. In addition, there is the ongoing risk that further interest rate cuts could risk over-inflating an already booming housing market. I recommend that the cash rate is left unchanged. </p>
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<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“With underlying inflation in the desired range, waiting would seem to be a better approach.”</strong></p>
<p>Despite recent headline inflation below 2%, there is little reason for the RBA to take other than a wait-and-see approach to the cash rate. International developments remain highly uncertain, with Europe and Japan remaining weak, while the US continues to recover. </p>
<p>With underlying inflation in the desired range, waiting would seem to be a better approach than using up ammunition, given fragility in the global economy.</p>
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<p>Bob Gregory, Professor of Economics at Australian National University:</p>
<p>This is becoming very difficult because although the Australian economy is going down in my view, I have no idea what will happen to world rates – except that the US and Europe will diverge – and no idea at this time as to how we will or should respond to this.</p>
<p>The increased uncertainty about world interest rates has encouraged me to essentially sit tight on our interest rates until I get a clearer fix on what is happening. Obviously, not expecting a large change in either direction.</p>
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<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“Lower oil prices are more of a net positive for the Australian economy than for Canada.”</strong></p>
<p>Headline inflation, currently at 1.7%, should be expected to remain below the 2-3% target range in the near term given the dramatic recent decline in oil prices. This provides considerable scope for the RBA to delay any increases in the policy rate until at least the second half of the year.</p>
<p>The continued collapse of iron ore prices and the decline in oil prices has prompted some speculation that the RBA will lower rather than raise rates in the near term, especially after the Bank of Canada recently lowered its policy rate in response to the decline in oil prices. It is possible that the RBA will do so.</p>
<p>However, it should be noted that lower oil prices are more of a net positive for the Australian economy than for Canada. And the lower Australian dollar has meant that there will be a broader compensation for the end of the mining boom than just strong growth in interest-sensitive sectors (e.g. construction). In particular, non-mining exports (e.g. higher education and tourism) can be expected to perform well. A robust recovery in the United States also provides some offset for the weaker-than-normal (but still fast) growth in China.</p>
<p>Overall, then, I would recommend the RBA maintain, but not lower, its already low policy rate and monitor how effectively the lower dollar stimulates non-mining exports. Any change in policy direction should be signalled by public communications (i.e. moving away from a reference to “a period of stability in interest rates” in policy statements) rather than trying to surprise markets, as was recently done by the Swiss National Bank in terms of its unconventional monetary policies.</p>
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<p>John Romalis, Professor of Economics at the University of Sydney:</p>
<p>There seems to be insufficient reason to change the current target cash rate. Inflation still seems likely to remain at moderate levels. Below-trend GDP growth and no obvious indicators of rapid expansion suggest that a low cash rate is still appropriate.</p>
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<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“There is significant potential for destabilisation of asset markets within Europe.”</strong></p>
<p>In the last two months, observed indicators of the Australian economy have weakened marginally. Aggregate hours worked declined by an annualised 3.7%, though the unemployment rate has fallen slightly to 6.1%. Inflation is at the bottom end of the RBA’s target range, helped down by the fall in energy and transport costs, which are likely to remain low for some time. </p>
<p>The trade-weighted index has depreciated significantly in the last half-year (by 15% annualised), which should eventually boost net exports. However, more depreciation is needed to seriously stimulate the below-normal growth of the Australian economy.</p>
<p>External risks have increased as a result of the recent election in Greece. There is significant potential for destabilisation of asset markets within Europe. The ECB will surely conduct large quantitative easing, helping to keep interest rates low. </p>
<p>The strengthening US economy is a major positive influence for the global economy, but not enough to prevent the IMF from predicting weakening global growth in 2015.</p>
<p>Overall, this indicates that the RBA should be delaying any plans to raise the cash rate in the future, and increases the probability of a cut in the next few months. I recommend no change this month.</p><img src="https://counter.theconversation.com/content/37037/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>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.tag:theconversation.com,2011:article/348072014-11-30T23:30:03Z2014-11-30T23:30:03ZRates tipped to stay on hold in final RBA decision for 2014<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>
<hr>
<p>Australia’s economic outlook has not moved much since last month. Growth remains slightly below trend and inflation well contained within the official target band. Weakening commodity prices, a pickup in domestic production, slowing growth in China and Europe and geopolitical uncertainty suggest the most appropriate action is for interest rates to stay on hold. </p>
<p>The CAMA RBA Shadow Board continues to recommend with confidence that the cash rate remain at its current level. The Board attaches a 70% probability that the cash rate ought to remain at 2.5% in December. The confidence attached to a required rate cut equals 5%, while the confidence in a required rate hike has increased to 25%.</p>
<p>There is no new data on headline inflation since the previous quarter when it fell 2.3%, largely driven by a fall in electricity prices. Sustained weakness in global energy prices will maintain downward pressure on domestic inflation.</p>
<p>The Australian dollar continues to hover around the 85 US¢ mark, a value many economists consider reflects fundamentals. If domestic interest rates have indeed bottomed out and demand picks up, the Aussie dollar may strengthen a little. Further softening of commodity prices may in turn lead to a continuing decline of the currency.</p>
<p>The Australian Bureau of Statistics’ most recent revision puts the unemployment rate at 6.2%. The employment-to-population ratio has dropped to 60.6%, the lowest it has been since late 2004. Without significant improvement of the labour market on the horizon, wages growth is likely to remain muted.</p>
<p>Business investment in capital goods, which includes buildings and equipment, rose 0.2% in the September quarter, well above economists’ expectations of a fall of up to 2%. This suggests that the Australian economy is successfully rebalancing as the mining boom wanes. This rebalancing is reflected in the shift of economic fortunes from the mining states to populous NSW and Victoria, with Sydney’s economy growing more than twice as fast in the last financial year (4.3%) as all other capital cities.</p>
<p>Other business indicators are mixed. Capacity utilisation increased slightly to 80.43% in October, as did the manufacturing PMI (from 46.47 in September to 49.42 in October). On the other hand, the Services PMI has fallen from 45.50 to 43.60 in October and the NAB monthly survey of business confidence has slipped slightly from 5 to 4. The Westpac-Melbourne Institute Leading Index of Economic Activity remained steady.</p>
<p>The outlook for the global economy is similar to the previous month’s. Europe, including Germany, risks a major recession while growth of China’s economy is modest. Better news is coming from the USA; however, with the Republicans taking control of Congress in this month’s midterm elections, President Obama will face fierce opposition, giving little hope for any serious structural reforms. The situation in Eastern Ukraine remains highly unstable and Western efforts to combat ISIS in Iraq and Syria continue to pose serious threats to any recovery of the world economy.</p>
<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at 2.5% remains virtually unchanged at 70%. The probability attached to a required rate cut equals 5% (6% in October) while the probability of a required rate hike has risen slightly to 25% (23% in October).</p>
<p>The probabilities at longer horizons are as follows: six months out, the probability that the cash rate should remain at 2.5% slipped down one percentage point, to 36%. The estimated need for an interest rate increase reverted back to its October value of 56% (54% in November), while the need for a decrease still equals 9%. A year out, the Shadow Board members’ confidence in a required cash rate increase is up 4 percentage points to 71%, the need for a decrease fell to 10% (12% in November), while the probability for a rate hold is 22% (23% in November).</p>
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<a href="https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65774/original/image-20141128-9758-chrpk2.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"></a>
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<a href="https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65773/original/image-20141128-9748-1ktft5g.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"></a>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
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<a href="https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65781/original/image-20141128-9748-1twsl0q.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"></a>
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<a href="https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65780/original/image-20141128-9748-53ds20.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"></a>
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<a href="https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65777/original/image-20141128-9758-gotw70.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"></a>
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<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
<p><strong>“Low interest rates are working to support growth.”</strong></p>
<p>Australia’s economic growth is continuing to re-balance from being mining-led to non-mining-led, largely as a result of very accommodative monetary policy. There continue to be clear signs that low interest rates are working to support growth. Housing market activity is still strong and non-mining business conditions are gradually improving. As yet, this improvement is yet to appear in the official labour market indicators, although other labour market measures suggest some stabilisation of conditions. </p>
<p>At the same time, the mining sector has weakened further in recent months. Iron ore prices have fallen to new five-year lows, which will be a drag on national income growth. The appropriate policy response, however, is to allow fiscal policy to be looser in the face of weaker national income growth. Monetary policy is already doing its job and demanding more of it, by cutting rates further, increases the risk of asset price misalignments. </p>
<p>Given that growth remains below trend and inflation is well contained, I recommend that the cash rate is left unchanged this month. I still expect that the cash rate may need to be lifted in the next 6-12 months, given the growing risks that could stem from leaving interest rates too low for too long.</p>
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<a href="https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65784/original/image-20141128-9764-184niqp.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"></a>
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<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“The RBA will sit on their hands again in December.”</strong></p>
<p>Little data to change the outlook from the previous month, so the RBA will sit on their hands again in December. Chinese data is still mixed, though recent rate cuts may improve the medium-term outlook and so lead to improving growth and higher rates in the medium to longer term. However, these rate cuts also reflect concern over the outlook, so the more likely outcome will have the RBA waiting for clearer positive signals on the global outlook before raising rates.</p>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65786/original/image-20141128-9779-77hw5n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&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>Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute of Applied Economic and Social Research at University of Melbourne:</p>
<p><strong>“The time for a rate change is approaching.”</strong></p>
<p>There are signs that growth in the economy is picking up, with contributions from non-mining investment and net exports. Although the unemployment rate is likely to stay around 6% for a few more months, it is expected to fall next year. It would be prudent to keep the cash rate at 2.5% for now, but the time for a rate change is approaching.</p>
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<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“I anticipate that the RBA will not start raising rates until early to mid-2015.”</strong></p>
<p>Inflation could pick up slightly in the near term as the one-time impact of removing the carbon tax wears off. But it should remain within the 2-3% target range. Meanwhile, a lower dollar and stable unemployment continue to provide scope for an increase in the policy rate to help cool the housing market.</p>
<p>But, similar to last month, I anticipate that the RBA will not start raising rates until early to mid-2015 after they have signalled a change in their plans for “a period of stability in interest rates”. Instead, there may be an imminent announcement on loan-to-value restrictions for mortgages similar to what was implemented by the RBNZ in New Zealand last year.</p>
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<p>John Romalis, Professor of Economics at the University of Sydney:</p>
<p>Moderate domestic growth, stable inflation, weakening commodity prices, slightly slower growth in China and fragility in Europe suggest that the target cash rate should not be rising any time soon.</p>
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<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The major unknown is when the Fed will choose to make its next move.”</strong></p>
<p>The modest trade-weighted growth of Australia’s major trading partners is likely to change little into 2015. Weakness in Japan and Europe should mean low global interest rates and ample liquidity through 2015, though the major unknown is when the Fed will choose to make its next move, given the growing strength in the US economy. </p>
<p>The RBA should remain cautious about raising the cash rate because the Australian dollar is likely to remain too strong into 2015. Australia needs further real depreciation to assist in the gradual rebalancing of its growth from the mining to the non-mining sectors. Though waiting for this rebalancing to occur risks asset price inflation, this is not yet a problem that should influence monetary policy.</p><img src="https://counter.theconversation.com/content/34807/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/337262014-11-03T00:51:45Z2014-11-03T00:51:45ZRBA’s holding pattern is likely to stay, for now<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>
<hr>
<p>Australian headline inflation eased from 3% p.a. in the second quarter to 2.3% p.a in the third quarter. The drop in inflation, along with the continued weakness in the global economy, takes some pressure off the RBA to lift the cash rate. On the other hand, the strong real estate market poses a worrying risk to financial stability. </p>
<p>The CAMA RBA Shadow Board continues to recommend with confidence that the cash rate remain at its current level. The Board attaches a 71% probability that the cash rate ought to remain at 2.5% in November. The confidence attached to a required rate cut equals 6%, while the confidence in a required rate hike has decreased to 23%.</p>
<p>The drop in headline inflation to 2.3% reduces the pressure for the RBA to lift the cash rate. However, the lower inflation rate is largely driven by a fall in electricity prices, following the abolition of the carbon tax in July, and should be interpreted as a once off adjustment to prices as opposed to a sustained fall in inflation. Furthermore, continued weakness of the Aussie dollar will add inflationary pressures to the domestic economy in the medium run.</p>
<p>The continued weakness of the Australian dollar will be welcome news for many exporters, especially in the manufacturing, education and tourism sectors. However, it normally requires sustained weakness of a currency before export volumes pick up.</p>
<p>Wages growth has been weak recently and with the unemployment rate above 6% will probably remain weak in the medium term.</p>
<p>Business indicators have softened further: the NAB Business Confidence, the Manufacturing PMI, and the Australian Performance of Services Index all posted lower numbers. The capacity utilisation rate fell to 80.17%. On the upside, the Westpac consumer confidence index improved slightly. Estimates of GDP growth are largely unchanged. Residential construction has continued to strengthen, benefiting from low interest rates and rising house prices. The fiscal outlook remains unclear with the government still not managing to pass all components of its May budget in the Senate.</p>
<p>The global economy is worsening. Europe, including Germany, looks to slide into recession. China’s economy seems a long way from returning to double-digit growth. The US economy has been mixed but low and falling inflation expectations in the world’s largest economy do not bode well for the future. In spite of the Federal Reserve Bank’s assurance that it will not revive its policy of quantitative easing, US interest rates, and global interest rates, are likely to stay very low for some time. The deterioration of the armed conflicts in Iraq and Syria pose a serious threat to the world economy.</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 71%. The probability attached to a required rate cut equals 6% (4% in October) while the probability of a required rate hike has fallen to 23% (25% in October).</p>
<p>The probabilities at longer horizons are as follows: 6 months out, the probability that the cash rate should remain at 2.5% edged down one percentage point, to 37%. The estimated need for an interest rate increase fell to 54% (56% in October), while the need for a decrease equals 9% (7% in October). A year out, the Shadow Board members’ confidence in a required cash rate increase is down 4 percentage points to 67%, the need for a decrease edged up to 12% (9% in October), while the probability for a rate hold rose to 23% (20% in October).</p>
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<img alt="" src="https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63452/original/pmkqvxgp-1414969946.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">
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<img alt="" src="https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63451/original/vqjy52kw-1414969932.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">
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63468/original/6wcvwxmb-1414973300.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"></a>
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<a href="https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63467/original/2yfj7k8r-1414973276.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"></a>
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<a href="https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63470/original/jwtn9s9y-1414973367.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"></a>
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<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
<p><strong>“The pick-up in the non-mining sectors is being led by a strong rise in housing prices.”</strong></p>
<p>The re-balancing of Australia’s economic growth from being driven by the mining sector towards the non-mining sectors has continued and is being supported by very low interest rates and a lower Australian dollar. </p>
<p>The pick-up in the non-mining sectors is being led by a strong rise in housing prices and an upswing in the residential construction cycle. Other sectors of the economy are showing positive signs and the rise in demand has been sufficient to keep underlying inflation in the upper half of the RBA’s target band over the past year. The pick up in demand has, however, not been strong enough to put downward pressure on the unemployment rate as yet, although there are signs that the labour market has stabilised. </p>
<p>As the cash rate has now been very low for an extended period, the risks of asset price misalignments are also increasing, with the strong rise in housing prices and increased investor interest in housing both symptoms of increased risk taking. Given that growth remains below trend and inflation is well contained, I recommend that the cash rate is left unchanged this month. I still expect that the cash rate may need to be lifted in the next 6-12 months, given the growing risks that could stem from leaving interest rates too low for too long. </p>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63474/original/382kvhh7-1414973599.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"></a>
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<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“The global outlook remains highly uncertain.”</strong></p>
<p>Recent weak wages growth is consistent with modest inflation outcomes in the medium term, and so less reason to raise rates in the next six months. Given asset price pressures it would still seem desirable to be moving rates towards a more neutral stance at the 12 month horizon. The global outlook remains highly uncertain however, and negative shocks may yet see rates stay on
hold.</p>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63476/original/97ghw66m-1414973684.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"></a>
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<a href="https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63475/original/8y9dxfj5-1414973669.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"></a>
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<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“The continued overheating of the housing market needs to be addressed.”</strong></p>
<p>Inflation eased in the most recent quarter to 2.3%. This provides the RBA with more scope to maintain its policy rate at the current low level. However, the continued overheating of the housing market needs to be addressed before it leads to a huge problem down the road. </p>
<p>Macroprudential policies such as restricting loan-to-value ratios provide a possible means for the RBA to cool the housing market. But these policies can have large distributional effects (e.g., they particularly affect first-time home buyers), without necessarily achieving a large overall effect on the market. Thus, the RBA will have to back up any macroprudential policies with
an increase in the policy rate in the near term, returning it back towards its neutral level. A lower dollar and stable unemployment provide scope for such a move by the end of the year. </p>
<p>But I anticipate that the RBA will not, in fact, start raising rates until March or April at the earliest after they have signalled a change in their plans for “a period of stability in interest
rates”.</p>
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<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The RBA may need to delay raising the cash rate.”</strong></p>
<p>Few would have expected that the world’s economies would still be grappling with the shadow cast by the 2008 financial crisis. While the US Fed has now completed its planned quantitative easing as the US economy begins to approach normality, the ECB has finally begun its program to provide much needed liquidity to the ailing Euro area. This should mean global interest rates will remain low for longer, and thus keep low the cost of foreign-sourced funds for Australian financial institutions. </p>
<p>As a result, the RBA may need to delay the time when it will begin raising the cash rate. However there is a marginally higher probability of a cut next year if the downward trend in Australia’s trading partners’ economies persists into 2015, notwithstanding the recent 5% depreciation of the real TWI (mainly due to the strengthening US dollar, to which the yuan is essentially pegged), which is a positive sign for Australian exports.</p><img src="https://counter.theconversation.com/content/33726/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/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>
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<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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<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/311622014-09-02T02:40:08Z2014-09-02T02:40:08ZEconomic outlook in Australia remains murky<figure><img src="https://images.theconversation.com/files/57974/original/h6ktw7xz-1409622658.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The picture of Australia's economy right now is murky.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/psjeremy/8038770631/sizes/l/in/photolist-dfmNrD-7sjK5J-jfcXA2/">PSJeremy/Flickr </a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><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>
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<p>The picture of the Australian economy painted by the latest data is murky. The housing market and indicators of sentiment are strengthening but growth remains slightly below trend and the unemployment rate rose to 6.4% in July. Relative to the previous month, the CAMA RBA Shadow Board has become slightly more cautious in its recommendations for interest rates. The Board attaches a 74% probability that the cash rate ought to remain at 2.5% in September. The confidence attached to a required rate cut equals 6%, while the confidence in a required rate hike has dropped to 21%.</p>
<p>Australia’s unemployment rate increased 0.3 percentage points to 6.4% in July 2014, a 12-year high. This rise is largely attributable to an increase in the participation rate — the number of persons in the labour force swelled by 43,000, while total employment fell slightly. Policy makers will be keeping a close eye on the developments in the labour market, in particular whether the additional job seekers are going to succeed in finding employment in the near future.</p>
<p>There is no new inflation data available to guide this month’s policy decision, with headline inflation officially still hugging the top of the 2-3% target band. Business indicators are looking up, with the NAB Business Confidence, the Manufacturing PMI, the Australian PSI, and the capacity utilisation rate all improving in the last month. GDP growth is estimated to lie just below trend. </p>
<p>The construction industry is responding positively to the housing boom, picking up some of the economic slack left behind from the slowdown in mining investment but some Board members remain concerned about inflated asset prices, particularly house prices in Sydney and Melbourne.</p>
<p>Worldwide foreign exchange markets are characterised by exceptionally low volatility. The Australian dollar has moved very little in the past few months, still buying around 93 US cents. There is still some uncertainty about the federal government’s budget and the government’s ability to navigate the Senate remains.</p>
<p>Mixed news also characterises the global economy. The US economy looks more solid, with recent second quarter GDP growth revised up to 4.2% (annualised). The US Federal Reserve’s hints of future tightening of US monetary policy is likely to weaken the Australian dollar and may provide greater scope for a domestic rate increase. </p>
<p>News of the Chinese real estate markets is providing further evidence of considerable excess supply with house prices in some cities, especially at the luxury end, falling sharply. Europe’s recovery is faltering and, most worryingly, there are signs of Germany’s economy slowing significantly. The major geopolitical conflicts (Syria, Ukraine, Middle East) are unlikely to be resolved any time soon.</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% has strengthened to 74% (up 3 percentage points from August). The probability attached to a required rate cut equals 6% (5% in August) while the probability of a required rate hike has fallen again to 21% (24% in August).</p>
<p>The six month probability that the cash rate should remain at 2.5% edged up two percentage points to 49%. The estimated need for an interest rate increase equals 42% (45% in August), while the need for a decrease equals 9% (8% in August). A year out, the Shadow Board members’ confidence in a required cash rate increase slipped 4 percentage points to 61%, the need for a decrease ticked up to 10%, while the probability for a rate hold strengthened slightly to 29% (26% in August).</p>
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<h2>Comments from Shadow Reserve bank members</h2>
<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
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<p><strong>“Growth looks to have been below trend.”</strong></p>
<p>Indicators of sentiment have continued to improve over the past month, notwithstanding an uptick in the measured unemployment rate in July. The established housing market has also shown signs of continued exuberance, particularly in Sydney and Melbourne. There have been further signs of a strong upswing in residential construction although, at the same time, mining investment has continued to fall. Overall, growth looks to have been below trend around the middle of the year, although the collection of indicators suggest that domestic conditions appear to have improved in the past month or two. </p>
<p>Given improving momentum in local growth and the booming housing market, the case for a further cash rate cut is weak. A key source of tension for the Australian economy remains the high AUD, particularly in the face of falling iron ore and coal prices and a significant narrowing in the interest rate differential between Australia and the US (the 10-year bond spread is around an 8-year low). </p>
<p>The combination of falling commodity prices and a high AUD is putting downward pressure on local income growth and helps to explain further weakness in the labour market. Australia’s growth prospects could be noticeably improved by a
lower AUD, but it remains a significant challenge to orchestrate such as move, with much dependent on international conditions. While a further cut in the cash rate could encourage the AUD to fall, lower rates could also drive excessive risk taking
in an already booming housing market and eventually threaten financial stability. </p>
<p>I recommend the cash rate is left unchanged this month. I expect that the cash rate may need to be lifted in the next six-12 months, to prevent a housing bubble from inflating, but the scope to lift rates is somewhat conditional on the direction the Australian dollar takes. </p>
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<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Rates may be at the lowest level they will be in our lifetimes.”</strong></p>
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<p>With the US continuing on track towards normalisation of monetary policy, the likelihood of the RBA cutting rates is receding. It is quite possible that current rates are at the lowest level they will be in our lifetimes. However, the speed of rate rises is likely to be slow in the next 1-2 years, with weak growth in advanced economies likely to be the norm.</p>
<hr>
<p>Bob Gregory, Professor of Economics at Australian National University:</p>
<p><strong>“We just have to wait and see for a while.”</strong></p>
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<p>This is a very slow time at the moment. We just have to wait and see for a while.
Looking forward a year international forces will encourage the Australian rate upwards, but domestic considerations will probably encourage the rate downwards with the likelihood of little change being high.</p>
<hr>
<p>John Romalis, Professor of Economics at the University of Sydney:</p>
<p><strong>“Faster GDP growth from rising commodity exports should be somewhat discounted.”</strong></p>
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<a href="https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/57954/original/swpzrdvc-1409619868.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"></a>
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<p>The Australian economy still seems to be slightly soft, with moderately elevated unemployment levels contributing to low wage growth and moderate inflation rates. Looking forward, rising housing construction should help offset the negative effects of declining mining investment. </p>
<p>Faster GDP growth from rising commodity exports should be somewhat discounted because fewer workers are required to run mines than to build mines and associated infrastructure. 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 fairly high 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>
<p><em>Note: John Romalis has replaced Saul Eslake on the CAMA RBA Shadow Board.</em></p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
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<a href="https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/57960/original/j389ddtp-1409620162.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"></a>
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<p>The news about the labour market in August suggests that the current accommodative stance of monetary policy needs to continue, along with a marginally higher delay before it needs to begin reversing.</p>
<hr>
<p><em>VERDICT FOR SEPTEMBER: cash rate ought to remain at 2.5%.</em></p><img src="https://counter.theconversation.com/content/31162/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, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/300822014-08-04T05:05:44Z2014-08-04T05:05:44ZEnd of low rates in sight as case for interest rate hike strengthens<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>New inflation and growth data suggest that the RBA’s low interest rate setting ought to come to an end soon. Inflation is close to the upper target band, consumer confidence has bounced back from the temporary drop in May and GDP growth remains solid. Though some weakness in the labour market remains, the majority of Shadow Board members is arguing for an interest rate increase in the foreseeable future. </p>
<p>That said, the CAMA RBA Shadow Board’s conviction that the cash rate ought to remain at 2.5% in August remains strong; it attaches a 71% probability that this is the appropriate setting. The confidence attached to a required rate cut has fallen one percentage point to 5%, while the confidence in a required rate hike has risen to 24%.</p>
<p>Headline inflation in Australia rose to 3% (year-on-year) in the second quarter of 2014, hitting the top of the RBA’s inflation target band of 2-3%. Core inflation in the same period has also edged up to 2.81%, suggesting that the increase in prices is broad-based. With domestic growth looking solid and other economic indicators (e.g. consumer confidence, business confidence, inventory stocks, private sector credit) pointing to a continuation of the economic expansion, the case for an increase in the benchmark policy rate is increasing. </p>
<p>Furthermore, among the Board members, concern about inflated asset prices, resulting from low interest rates, is rising. The biggest factor holding interest rates in check appears to be the unemployment rate which currently stands at 6% and is unlikely to improve significantly.</p>
<p>The Australian dollar remains relatively strong, hovering around 93 US cents. Some uncertainty remains about the federal government’s budget, with the Senate unlikely to pass significant sections of the budget announced in May.</p>
<p>The global economy appears to be improving. US second quarter GDP roared back to 4% (annualized), after an unusually weak first quarter. This is supported by a further reduction in the US unemployment rate. The Federal Reserve is continuing with its phase-out of quantitative easing, and financial markets are beginning to price in an interest rate rise in the medium term. China’s economy is steadying; the European economies are still languishing, but not worsening. </p>
<p>Some global risks remain, in particular geopolitical conflicts (such as Syria, <a href="https://theconversation.com/explainer-how-will-sanctions-against-russia-work-29920">Ukraine</a>, and the <a href="https://theconversation.com/here-we-go-again-israel-and-hamas-resume-their-war-29379">Israeli/Gaza conflict</a>) but also economic and financial problems including the economic slowdown of BRICS countries and <a href="https://theconversation.com/for-argentina-debt-default-is-a-solution-not-a-problem-30010">Argentina’s second debt default</a>.</p>
<hr>
<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at its current level of 2.5% has fallen 5 percentage points to 71%. The probability attached to a required rate cut is up a percentage point to 5% while the probability of a required rate hike has risen to 24% (20% in July).</p>
<p>Six months out, the probability that the cash rate should remain at 2.5% is unchanged at 47%. The estimated need for an interest rate increase equals 45% (41% in July), while the need for a decrease equals 8%. A year out, the Shadow Board members’ confidence in a required cash rate increase has risen further to 65% (61% in July), the need for a decrease fell to 9% (11% in July), while the probability for a rate hold slipped two percentage points to 26% (28% in July).</p>
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<span class="caption">Aggregate August.</span>
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</figure>
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<a href="https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.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"></a>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p><strong>“Prevent a housing bubble from inflating.”</strong></p>
<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55599/original/khvkvvy9-1407117522.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"></a>
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<a href="https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.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"></a>
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<a href="https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55598/original/vykytxww-1407117472.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"></a>
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<blockquote>
<p>Timely indicators of economic conditions have generally improved in the past month. Consumer sentiment has bounced back, after having fallen sharply in response to the May Federal budget. Activity in the housing market has picked up, after having slowed around May. Business sentiment remains positive and a recent lift in business credit growth provides an early sign that corporate sector investment may be starting to lift. China’s growth has also lifted, which is providing some support for iron ore prices in the past month, following significant falls earlier in the year. </p>
<p>The labour market remained broadly steady, with the unemployment rate around the same level as at the beginning of the year. At the same time, the Q2 CPI print showed that underlying inflation remains solidly in the upper half of the 2-3% target band. Very accommodative monetary policy appears to be working and inflation is in the upper half of the target band, which provides little scope or necessity for the board to consider cutting rates further. </p>
<p>Indeed, in my view, the risk that low rates may start to drive excessive risk taking in the housing market is building, which could eventually threaten financial stability. I recommend the cash rate is left unchanged this month, but 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>
</blockquote>
<hr>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Hopes for US and Europe to edge closer to normalising monetary policy.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.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"></a>
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<a href="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.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"></a>
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<blockquote>
<p>There is little in the current environment to suggest anything other than sitting on one’s hands for the moment. In the six to 12 month horizon we can hope that the US and Europe continue to edge closer to normalising monetary policy, freeing up the RBA to also move rates closer to a more usual neutral rate.</p>
</blockquote>
<hr>
<p>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University:</p>
<p><strong>“Inflation is edging up, but the case for an immediate hike is not strong.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>The case for tighter monetary policy has strengthened as inflation is edging up along with a pick-up in the growth of credit. However, the case for an immediate hike in the cash rate is not strong as growth in activity and employment remain tentative.</p>
</blockquote>
<hr>
<p>Warwick McKibbin, Professor, Australian National University, CAMA:</p>
<p><strong>“The blocking of policy reform by the Australian Senate is making a bad situation worse.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.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"></a>
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<blockquote>
<p>With domestic goods price inflation rising to the top of the RBA’s inflation target band and asset price inflation clearly rising to uncomfortable levels the current policy interest rate in Australia is too low. Monetary policy is too expansionary. The dilemma for the RBA is how to get back to a more neutral interest rate given global policy settings. The strong Australian dollar will continue while foreign investors search for yield and the international adjustment of monetary policies continue to drive global currencies. Clearly the policy answer lies outside the domain of monetary policy. </p>
<p>The current problem in Australia is in the settings of fiscal policy and the lack of appropriate structural adjustment policies. In a world of significant geo-political risks and economic uncertainty the blocking of policy reform by the Australian Senate is making a bad situation worse by hurting consumer confidence. There is little that monetary policy can do to negate the near term and more serious long term economic damage caused by the current political standoff.</p>
</blockquote>
<hr>
<p>James Morley, Professor, University of New South Wales, CAMA:</p>
<p><strong>“Ongoing weakness in the labour market may see the RBA hold steady.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.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"></a>
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<blockquote>
<p>Inflation is running at the high end of the RBA’s target range of 2-3%, with year-on-year headline inflation in June of 3.0% and underlying inflation (excluding volatile items) of 2.8%. Given these inflation numbers, the RBA needs to consider raising the policy rate in the medium term. However, unless inflation looks to actually fall outside the target range, ongoing weakness in the labour market suggests that the RBA can hold the policy rate steady in the immediate future.</p>
</blockquote>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The pressure to raise interest rates sometime next year continues to increase.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.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"></a>
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<blockquote>
<p>The pressure to raise interest rates sometime next year continues to increase given Australia’s inflation rate in the second quarter reached the upper limit of the RBA’s target band of 3%, that hours worked increased 0.9% despite the unemployment rate rising to 6% in June, and that output growth in the first quarter was a little above normal at 3.8%. </p>
<p>This future recommendation is supported by the fact that the US economy growth has recovered significantly in quarter 2 to 4% following its temporary weather-related drop in the previous quarter. However, as a counter-weight, the IMF has lowered its prediction a little for China ‘s growth in 2015.</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. Saul Eslake has resigned from the CAMA RBA Shadow Board and did not vote in this round.</em></strong></p>
<p><em>VERDICT FOR AUGUST: cash rate ought to remain at 2.5%.</em></p><img src="https://counter.theconversation.com/content/30082/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, 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>
<figcaption>
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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">
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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.tag:theconversation.com,2011:article/273862014-06-01T20:20:29Z2014-06-01T20:20:29ZRates should hold until post-budget malaise clears<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>When the Reserve Bank of Australia meets tomorrow to decide whether to change Australia’s cash rate, it will have to assess an economy that remains in limbo.</p>
<p>While non-mining businesses appear to strengthen and the labour market is holding up, consumer confidence has taken a hit after the Coalition government’s first budget a fortnight ago. Meanwhile, revisions to US and Chinese GDP growth are giving cause for concern. </p>
<p>The unemployment rate is stuck at 5.8%, with only minimal movements in full time employment, the participation rate and monthly job vacancies. There is no new information about inflation until the release of second quarter inflation measures. The Australian dollar, currently experiencing lower than average volatility, is hovering around 93 US cents. Asset markets, housing and stocks, remain buoyant.</p>
<p>The global economy does not present a clear picture. Recent revisions to US first quarter GDP growth reveal that the world’s largest economy shrank by a whole percentage point, considerably more than expected. Policy makers and analysts are quick to point out that this was due to the severe winter but it may offer the Federal Reserve additional wriggle room to extend its asset purchasing program. There has been no news out of China to hint at an acceleration of its economy; credit conditions and the fragile real estate market there remain a concern.</p>
<p>The biggest change in statistics is the sharp drop in consumer confidence, measured by the Westpac consumer sentiment index, following this month’s budget. While the budget’s overall stance was not as contractionary as feared, the public and many analysts considered it to be overly regressive. </p>
<p>The index fell to 92.9, down nearly seven points from April. This fall may turn out to be temporary as the disapproval of the budget subsides. However, it actually continues a downward trend, after the index hit a high of 110.63 in September 2013. As a leading indicator, this is a number to watch closely in the coming months.</p>
<h2>What the CAMA Shadow Board believes</h2>
<p>The CAMA RBA Shadow Board overwhelmingly believes the cash rate ought to remain steady at 2.5%; it is attaching a 74% probability that this is the appropriate setting. </p>
<p>The probability attached to a required rate cut equals 6%, unchanged from last month, while the probability of a required rate hike has fallen slightly to 20%.</p>
<p>The consensus to keep the cash rate at its current level of 2.5% has strengthened slightly. The Shadow Board’s confidence in keeping the cash rate steady equals 76% (74% in May 2014). The probability attached to a required rate cut remains steady at 6% while the probability of a required rate hike has slipped to 18% (20% in May).</p>
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<p>The six month probability that the cash rate should remain at 2.5% rose to 46% (39% in May). The estimated need for an interest rate increase is 40%, down eight percentage points from May, while the need for a decrease has edged down two percentage points to 14%. </p>
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<p>A year out, the Shadow Board members’ confidence in a required cash rate increase is unchanged at 59%, the need for a decrease fell to 13% (down from 18% in May), while the probability for a rate hold has increased to 28% (up from 23% in May).</p>
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<h2>Comments from Shadow Reserve Bank members</h2>
<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
<blockquote>
<p>Australia’s growth appears to be re-balancing from being led by mining investment to being driven by growth in the non-mining sectors. </p>
</blockquote>
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<blockquote>
<p>Low interest rates are a key catalyst for this process, with the lift in activity mostly coming from the consumer and housing sectors. The lift in growth is also starting to feed through to an increase in hiring, with the unemployment rate having ticked down in the past couple of months. </p>
<p>At the same time, the current level of the unemployment rate has kept downward pressure on wages growth, which is helping to ensure that inflation remains well contained. The budget appears to have had a negative impact on consumer sentiment, although it is not yet clear if this will be temporary. </p>
<p>The slowdown in Chinese growth is also having an impact on Australia, particularly through lower iron prices. It will be important to continue to monitor the Chinese
economy, given that growth is currently running below the Chinese authority’s target. I recommend that the cash rate is left unchanged this month. </p>
</blockquote>
<hr>
<p>James Morley, Professor, University of New South Wales, CAMA:</p>
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<blockquote>
<p>The large decline in consumer confidence following the contractionary Federal budget makes it riskier for the RBA to start increasing the policy rate in the near future. </p>
<p>However, the RBA should monitor credit conditions and move quickly to adjust the policy rate in the event of abnormal credit growth. </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 JUNE: rates should remain steady.</em></p><img src="https://counter.theconversation.com/content/27386/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.tag:theconversation.com,2011:article/262892014-05-05T03:27:14Z2014-05-05T03:27:14ZRates: housing-led upswing, but tight budget may drag growth<figure><img src="https://images.theconversation.com/files/47768/original/kqp9x4yn-1399257380.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Economic activity led by housing is strengthening - but a tough budget may dampen growth. </span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p>Latest economic news shows some promising signs for the Australian economy. However, the new government’s first budget next Tuesday is a big unknown. </p>
<p>The <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">unemployment rate fell to 5.8%</a> in March while full time employment fell by 22,000 and the participation rate edged down to 64.72%. Monthly job vacancies remained strong, only 1% below the long-run average.</p>
<p><a href="http://www.tradingeconomics.com/australia/indicators">Core inflation</a> lies a little above the middle of the RBA’s target band of 2-3%. The Australian dollar has held up during the past month, now valued at 93 US cents. Asset markets, in particular housing, remain buoyant. Domestic consumption and production indicators are continuing on their modest upward trend.</p>
<p>Internationally, the clouds appear to be lifting ever so slightly. <a href="http://www.federalreserve.gov/newsevents/press/monetary/20140430a.htm">US economic data is improving</a> and the US Federal Reserve Board announced a further reduction of its asset purchasing program. Several European crisis countries, foremost Greece, are finally showing signs of rebounding. In particular, their increased access to international credit markets at favourable conditions has surprised many analysts. <a href="http://www.abc.net.au/news/2014-04-16/chinas-annual-growth-rate-slows-to-74-per-cent/5395906">China’s growth is slowing</a>, and the possibility of a credit crunch remains real, but a growth rate of 7% is considered by many to be a lower bound.</p>
<p>The big unknown for Australia is the forthcoming federal government budget. It will likely be contractionary for the economy overall as the Coalition government seeks to reduce spending in a long-term effort at balancing the budget. Moreover, there is much speculation about the distributive implications of the budget. If the budget turns out to be tight and regressive, it will reduce aggregate demand and increase the likelihood that interest rates remain low.</p>
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<p>The Centre for Applied Macroeconomic Analysis (CAMA) Shadow Board is 74% confident that the cash rate should remain steady at 2.5%, strengthening slightly from a confidence rating of 71% in April. The probability attached to a required rate cut equals 6% - up from 4% in April - while the probability of a required rate hike has fallen to 20%, from 25% in April.</p>
<p>The six month probability that the cash rate should remain at 2.5% edged down to 37% (39% in April). The estimated need for an interest rate increase is virtually unchanged at 48%, while the need for a decrease has risen slightly to 16% (12% in April). A year out, the Shadow Board members’ confidence in a required cash rate increase has dropped 8 percentage points to 59%, the need for a decrease rose to 18% (down from 14% in April), while the probability for a rate hold has increased to 23% (down from 19% in April).</p>
<p><em>Note: Mardi Dungey was unable to vote in this round.</em></p>
<hr>
<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<a href="https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47727/original/363vk2fk-1399252620.jpg?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"></a>
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<p>The Q1 CPI numbers showed that underlying inflation is just a touch above the middle of the RBA’s target band. To a large degree, this vindicates previous interest rate settings, given the lags involved in the transmission of monetary policy to the economy. It also helps to support the case for the RBA to leave its interest rate setting unchanged for the moment. </p>
<p>However, monetary policy needs to be forward looking, and recent timely indicators continue to suggest that economic activity is lifting, led by the housing sector and largely in response to the current very stimulatory setting of the cash rate. This month also saw further evidence that the lift in activity is beginning to translate into job creation, with the unemployment rate ticking down to a
four-month low. </p>
<p>As yet, there are limited tangible signs that businesses are considering an increase in their capital expenditure, although this tends to occur in tandem with an increase in hiring. Should the current improving trends in activity and the labour market persist, the risks to inflation should be expected to shift to the upside, at which point, the RBA would need to consider starting to move its cash rate back towards a neutral setting. A very tight budget is a downside risk to this outlook and could be a consideration for monetary policy in coming months. I recommend that the cash rate is left unchanged this month at 2.5%, but
still see it as more likely than not that the cash rate will need to be higher than its current level in 12 months time.</p>
<hr>
<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<a href="https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47726/original/rtz8xy3z-1399252619.jpg?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"></a>
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<p>While indicators for both the domestic economy and the international economy continue to be mixed, ongoing asset price increases should lead to a tightening bias in coming months. My expectation is that China will achieve growth around the 7% range in 2014, underpinning net exports and near trend GDP growth in Australia for the calendar year. </p>
<hr>
<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<a href="https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47730/original/2vwdvjp4-1399252624.jpg?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"></a>
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<p>No comment. </p>
<hr>
<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
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<a href="https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47733/original/stpfvzq8-1399252627.jpg?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"></a>
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<a href="https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47734/original/9d6fpnwt-1399252628.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University:</strong></p>
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<a href="https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47722/original/9qg8qf7q-1399252615.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47735/original/zk89zwqy-1399252628.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47736/original/s48wtsvp-1399252630.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&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>It is difficult to argue for a change in the current stance of monetary policy. Yes, leading indicators are signalling improvements, but they are not strong enough to warrant an increase in the cash rate now. On balance, I still think it would be prudent to keep the cash rate at 2.5%, for now. </p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
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<a href="https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47728/original/wghchgrp-1399252622.jpg?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"></a>
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<a href="https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47747/original/7vgy5tzy-1399252641.jpg?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"></a>
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<a href="https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47748/original/pxq2kbyn-1399252642.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47723/original/73658tzw-1399252615.jpg?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"></a>
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<a href="https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47738/original/fpcjrsmb-1399252632.jpg?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"></a>
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<a href="https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47737/original/75xw7x3j-1399252631.jpg?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"></a>
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<p>Inflation remains stable. But the economy is fragile, especially given a likely fiscal contraction. In light of this, the RBA should keep the policy rate low for longer than previously planned, despite the risks of financial imbalances arising from interest rates remaining below more neutral levels. </p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47725/original/2j9c9skp-1399252618.jpg?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"></a>
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<a href="https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47739/original/jg5dtk39-1399252633.jpg?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"></a>
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<p>My recommendations for monetary policy in May 2014 have become marginally more accommodative. The government has been revealing that the federal budget is likely to significantly consolidate current and future government expenditure and tax revenues. Many of the measures will aim to address important longer run issues, but they will all have the shorter term consequence of delaying the slow recovery of the Australian economy. The global recovery, which is becoming
broader and stronger, is unlikely to be enough to counteract the fiscal consolidation. Therefore, monetary policy will need to remain accommodative for somewhat longer, thus postponing its normalisation.</p><img src="https://counter.theconversation.com/content/26289/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>Latest economic news shows some promising signs for the Australian economy. However, the new government’s first budget next Tuesday is a big unknown. The unemployment rate fell to 5.8% in March while full…Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/250232014-03-31T04:59:34Z2014-03-31T04:59:34ZPromise on the horizon for Australian economy<p>The Australian economy appears to be benefiting from the current expansionary stance in monetary policy, despite uncertainties in the global economy. </p>
<p>The <a href="https://cama.crawford.anu.edu.au/rba-shadow-board">CAMA Shadow Board</a> is 71% confident that the cash rate should remain steady at 2.5%. The probability attached to a required rate cut equals 4% while the probability of a required rate hike has increased to 25%.</p>
<p>The Australian labour market is showing promising signs, with a surprisingly robust increase in employment in February 2014 (an increase of 47,000 for overall employment and 80,500 for full time employment). As the participation rate also rebounded from 64.49% to 64.85%, the unemployment rate remained unchanged at 6%.</p>
<p>Inflation remains within the 2-3% target range. The Australian dollar has appreciated considerably, this week making a four month high of over 92 US cents. Asset markets, in particular housing, remain buoyant. Overall, domestic consumption and production indicators point to a marginal improvement. Encouragingly, the AIG manufacturing index rose to 48.6 in February (compared to 46.7 in January 2014 and 45.6 a year ago) and the ACCI New Orders increased to 26 in the first quarter of 2014 from 13 in the fourth quarter of 2013.</p>
<p>At the moment, the greatest threat to the Australian economy comes from the international economy. US economic data is still mixed but improving. There is growing confidence in the likelihood that the Federal Reserve Board will tighten monetary policy by the end of this year. </p>
<p>Of considerable concern is the fallout from a deterioration of the political crisis engulfing the Ukraine and Russia. This might include trade and investment sanctions, higher energy prices and volatile capital flows. China’s economy looks like cooling further, pointing to a softening of commodity prices, coal in particular.</p>
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<p>The consensus to keep the cash rate at its current level of 2.5% remains strong. The Shadow Board’s confidence in keeping the cash rate steady equals 71% (73% in March 2014). The probability attached to a required rate cut equals 4% (8% in March) while the probability of a required rate hike has increased to 25% (19% in March).</p>
<p>The six months probability that the cash rate should remain at 2.5% is unchanged at 39%. The estimated need for an interest rate increase has increased from 43% to 49%, while the need for a decrease has fallen to 12% (19% in March). A year out, the Shadow Board members’ confidence in a required cash rate increase has risen to 67% (54% in March), the need for a decrease dropped to 14% (down from 19% in March), while the probability for a rate hold has fallen to 19% (down from 26% in March).</p>
<p><em>Note: Mark Crosby, Mardi Dungey and Bob Gregory were unable to vote in this round, so the linear opinion pool aggregate is based on the remaining six members.</em></p>
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<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>Local activity indicators are continuing to show that growth is picking up. Retail sales are growing at their fastest rate since 2010, housing prices continue to rise at low double digit annual rates, forward-indicators suggest that residential construction activity is picking up pace and the business surveys report an improvement in conditions. </p>
<p>This month also brought indications that the pick-up in activity is starting to feed through to a lift in employment. If coming months bring further signs of improvement in the labour market, this would start to suggest that the current very stimulatory setting of monetary policy may be unnecessary. </p>
<p>A further pick-up in activity could also tilt the inflation risks to the upside and, with inflation already in the upper half of the target band, would suggest that rates may soon need to rise to keep inflation comfortably within the target band. I recommend that the cash rate is left unchanged this month, but looking forward, I see it as more likely than not that the cash rate will need to be higher than its current level in 12 months time.</p>
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<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<p>No comment.</p>
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<p><strong>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University:</strong></p>
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<a href="https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45089/original/9brmfmvw-1396227514.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45090/original/tzvkj8yn-1396227516.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45091/original/gtgv8qxz-1396227516.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&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>No comment.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45094/original/dt4m4vrh-1396227521.jpg?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"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45096/original/t7rhs4pt-1396227522.jpg?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"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45098/original/qfcxsjdp-1396227526.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45097/original/rqfsvmqn-1396227525.jpg?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"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45100/original/7qw4w6zg-1396227529.jpg?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"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45103/original/mw3hg7dy-1396227535.jpg?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"></a>
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<p>Given a weak labour market and stable inflation expectations, the RBA should hold the policy rate at its current accommodative
level for the time being. But the next move in the medium term should be to raise the policy rate in order to return it to a more
neutral level.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45086/original/wbr9q6wr-1396227511.jpg?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"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45087/original/j5hbf4qx-1396227512.jpg?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"></a>
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</figure>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45088/original/hcnwchzp-1396227513.jpg?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"></a>
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<p>In the last month, any positive news appears to have been balanced by the negative, so I see no reason to change my
recommendations. Australia’s labour market has not improved much with unemployment constant at 6%, employment
higher marginally, but hours worked down. Output growth in Australia marginally improved in 2013 Quarter 4, but this was led
by a marked decline in household saving overcoming the demand effects of a decline in real investment. Globally, the advanced
economies are now growing more, and while this growth will be helpful for the Australian economy, it will mean the winding
down (or tapering) of quantitative easing in the US (and perhaps later in Japan and Europe), which will begin to push up interest
rates in the next few years. The gradual improvement in growth in the advanced countries is counterbalanced by the possible
effects of realised credit risks in China for its growth, and the danger of energy price rises from an escalation of the Ukraine
crisis. </p><img src="https://counter.theconversation.com/content/25023/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 Australian economy appears to be benefiting from the current expansionary stance in monetary policy, despite uncertainties in the global economy. The CAMA Shadow Board is 71% confident that the cash…Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/239072014-03-03T05:00:49Z2014-03-03T05:00:49ZSpectre of rising unemployment to weigh on rates decision<p>The key question for interest rates this month is whether improving domestic demand will curb the increasing rate of unemployment and underemployment, or whether labour market weakness will persist.</p>
<p>The Reserve Bank of Australia meets to deliberate on whether to maintain the cash rate at 2.5%. The <a href="https://cama.crawford.anu.edu.au/rba-shadow-board">CAMA RBA Shadow Board</a> is 73% confident that the cash rate should remain steady at 2.5%. The probability attached to a required rate cut equals 8% while the probability of a required rate hike has fallen to 19%.</p>
<hr>
<p><strong>Read previous CAMA Shadow Board deliberations <a href="https://theconversation.com/topics/interest-rates">here</a>.</strong></p>
<hr>
<p>The Australian unemployment rate rose to 6% in January 2014, with underemployment and the median duration of unemployment also worsening.</p>
<p>Inflation has edged up but remains within the 2-3% target range. The Australian dollar has rebounded slightly from its recent lows, to approximately 90 US cents. Asset markets, in particular housing, remain buoyant, bolstering the concern that it is cheap money, not sound fundamentals, that is driving asset prices.</p>
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<p>Overseas, the picture is much the same as in the previous month. US economic data is still mixed although US GDP growth has been revised down to below 3%. The US unemployment rate fell faster than expected, largely due to a fall in the labour force, that is people are giving up looking for work rather than finding work.</p>
<p>Investors will closely scrutinise the new rhetoric of Federal Reserve Board governor Janet Yellen to identify any change in policy stance. The spectre of deflation is rearing its head in the Eurozone while major developing economies, especially the BRICS countries, continue to weaken. Global economic weakness may help to put a floor on the Australian dollar as international investors are looking for safe havens unless commodity prices plummet.</p>
<p>The consensus to keep the cash rate at its current level of 2.5% has increased further. The Shadow Board’s confidence in keeping the cash rate steady equals 73% (68% in February 2014). The probability attached to a required rate cut equals 8% (3% in February) while the probability of a required rate hike has fallen to 19% (28% in February).</p>
<p>The six month probability is that the cash rate should remain at 2.5% is unchanged at 39%. The estimated need for an interest rate increase is down a percentage point to 43%, while the need for a decrease has nudged up to 19% (17% in February). </p>
<p>A year out, the Shadow Board members’ confidence in a required cash rate increase has fallen to 54% (58% in February), the need for a decrease remains unchanged at 19%, while the probability for a rate hold has risen to 26% (up from 23% in February).</p>
<hr>
<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>With inflation already in the upper half of the target band there is little scope to cut interest rates further. The recent data also suggest that low interest rates, and a now lower currency, are already having the desired effect of lifting domestic demand. One area of continued weakness is the labour market, although the timely indicators suggest that there may be some improvement in employment conditions afoot, consistent with the typical lag between a lift in activity and a rise in hiring. A weak labour market and slow wages growth should limit the need to lift interest rates any time soon, although if the labour market improves it may be necessary to start to consider moving interest rates back towards neutral. I recommend that the cash rate is left unchanged this month. Looking forward, I see it as more likely than not that the cash rate will need to be higher than its current level in 12 months time.</p>
<hr>
<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<p>With tapering continuing and signs consistent with ongoing recovery, albeit weak, in advanced economies the medium term outlook is likely to be for modest increases in rate settings.</p>
<hr>
<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<a href="https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42873/original/f7m24fg3-1393806102.jpg?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"></a>
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<a href="https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42869/original/62v66qf8-1393806094.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42874/original/vcht5b3d-1393806102.jpg?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"></a>
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<a href="https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42871/original/k8mrzdz5-1393806095.jpg?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"></a>
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<a href="https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42870/original/w99h25kb-1393806095.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University</strong></p>
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<a href="https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42859/original/m6mngp47-1393806068.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42857/original/bvhb4w9q-1393806067.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42858/original/839yt32c-1393806067.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&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>There are weak signs that the Australian economy will grow (albeit sluggishly), and inflationary pressures, if any, appear to be benign. But the recent hike in the unemployment rate is cause for concern even though one should bear in the mind that many summary measures of labour market activity are lagging indicators. On balance, it would be prudent to hold the cash rate at 2.5% – an increase might be premature (given the state of the labour market), while a cut might fuel an asset (housing) bubble.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
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<a href="https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42856/original/pqhwyvc8-1393806062.jpg?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"></a>
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<a href="https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42854/original/22xgdpy6-1393806060.jpg?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"></a>
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<a href="https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42855/original/t7ns99j6-1393806060.jpg?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"></a>
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<p>Continued strong domestic non‐traded goods inflation together with rising traded goods inflation is concerning especially at a time of labour market weakening. A greater concern is the rise in asset prices, particularly housing prices over the past year. This suggest that excess liquidity is driving market valuations above that would be expected with more normal interest rate settings. The major problem for growth prospects in Australia is on the supply side and particularly the continued high input cost structure. </p>
<p>A stronger currency cannot be ruled out particularly given events outside Australia which make Australia an attractive place to hold assets relative to other countries who have severe economic and debt sustainability problems. Unfortunately there is not a great deal that monetary policy can do to solve Australia’s competitiveness problem which can only effectively be addressed by structural reform and a refocussing of fiscal policy.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42866/original/933p7dt4-1393806089.jpg?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"></a>
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<p>Continued weakness in the labour market, with the January unemployment rate hitting 6%, argues for further delay in raising rates back to their neutral level.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<p>The labour market is showing weakness: the unemployment rate rose to 6% in January 2014, underemployment in September 2013 worsened with now more than a quarter of part‐time workers wanting to work more, the median duration of underemployment rose to 30 weeks and wage growth has continued to slow. These are mostly the lagging effects of the persistently high real exchange rate that peaked in April 2013 and is still about 15% too high and likely to remain that way for some time. </p>
<p>In addition, the world economy continued to recover only slowly, and the Australian government is seeming to prepare significant fiscal consolidation in its first few budgets. Though inflation has edged up within the RBA’s target zone, these other factors indicate that monetary policy needs to remain accommodating for even longer going into next year.</p><img src="https://counter.theconversation.com/content/23907/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 key question for interest rates this month is whether improving domestic demand will curb the increasing rate of unemployment and underemployment, or whether labour market weakness will persist. The…Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/227042014-02-04T00:01:13Z2014-02-04T00:01:13ZWaiting game on economy means RBA should hold<figure><img src="https://images.theconversation.com/files/40545/original/r9s8rxdy-1391467884.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's economic position remains uncertain, which may prompt the Reserve Bank to hold interest rates. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Without a clear direction of where the Australian economy is heading, the consensus to keep the cash rate at its current level of 2.5% remains strong. </p>
<p>Uncertainties surrounding the domestic and foreign economies have not abated since the RBA last met in December. Globally, while asset markets are performing well, GDP growth remains subdued, pointing to a disparity that must be resolved eventually.</p>
<p>The Centre for Applied Macroeconomic Analysis (CAMA) Shadow Board’s confidence in leaving the cash rate steady rose to 68% (up from 63% in December 2013). According to shadow board members, the probability of a rate cut being required is 3% (down from 7% in December) while the probability of a rate hike being needed is 28% (down from 30% in December).</p>
<p><a href="http://www.rba.gov.au/inflation/measures-cpi.html">Inflation remains well within the 2-3% target range</a>, despite a larger than expected increase in December, <a href="http://www.bree.gov.au/media-releases/20131218">investment (especially in mining)</a> and consumption remains tepid. The economy is being supported by historically low interest rates and an Australian dollar now hovering around 87 US cents, a 21% fall from its recent peak. This expansionary policy setting is generating early signs of improvements in retail sales, building approvals and local business conditions.</p>
<p>Overseas, the picture continues to be characterised by uncertainty. While growth in US output has accelerated to an annualised rate of 3.2%, underscoring the US Federal Reserve’s decision to taper its quantitative easing program, the rest of the global economy is looking less promising. </p>
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<p>Europe will probably continue to show weak growth as long as the debt overhang and structural problems caused by the sovereign debt crisis are not fully addressed, while China will likely settle on a <a href="http://www.reuters.com/article/2014/02/03/us-china-economy-services-pmi-idUSBREA1203G20140203">lower growth trajectory</a>, with the possibility of a more <a href="https://theconversation.com/out-of-the-shadows-chinas-financial-problems-have-international-implications-22477">damaging credit crisis persisting</a>.</p>
<p>Both domestic and international asset markets have experienced double digit gains in 2013, fuelled by cheap credit and possibly excessive optimism. This divergence between the real economies and asset prices will ultimately need to narrow, either because global economic growth picks up significantly, validating the large increases in asset prices, or because asset prices will fall to more realistic levels.</p>
<hr>
<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<a href="https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40513/original/p5c7crrs-1391464972.jpg?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"></a>
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<p>Timely demand indicators for the local economy have generally lifted since the last board meeting. Retail sales, building approvals and measures of local business conditions have all shown improvement over the past couple of months. The housing market has also continued to pick up strongly. Together, these indicators suggest that monetary policy is continuing to get traction in the economy. The recent fall in the Australian dollar has also helped to loosen financial conditions further. The recent lift in inflation suggests that there is unlikely to be much scope to cut interest rates any further during this easing phase, barring an unforeseen negative shock. I recommend that the cash rate is left unchanged at 2.50% and see it as more likely than not that the cash rate will need to be higher than its current level in 12 months time.</p>
<hr>
<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<a href="https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40520/original/mdzjfkfg-1391465687.jpg?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"></a>
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<a href="https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40519/original/3r78mhny-1391465661.jpg?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"></a>
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<a href="https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40518/original/jbdhsyk2-1391465647.jpg?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"></a>
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<p>Continuing uncertainty about the speed and impact of tapering suggests adjustments to monetary policy in the short term ought to be made with caution.</p>
<p>At the six to 12 month horizon, the RBA will have to juggle continued weakness in advanced economies, and some important emerging markets against the problems of inflation and asset price growth caused by continued low interest rates.</p>
<hr>
<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40523/original/6vcb6vjw-1391465798.jpg?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"></a>
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<a href="https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40521/original/5ztch5fc-1391465715.jpg?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"></a>
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<p>No comment</p>
<hr>
<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<a href="https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40526/original/p79xxmvb-1391465929.jpg?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"></a>
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<a href="https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40525/original/kpd2gvmn-1391465911.jpg?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"></a>
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<a href="https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40524/original/63mks9zf-1391465891.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
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<a href="https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40529/original/n255596f-1391466002.jpg?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"></a>
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<a href="https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40527/original/fztpbvgq-1391465967.jpg?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"></a>
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<p>I am becoming more uncertain, not about the range of possibilities, but what probability to attach to each one. Have a clear view on the economy - it is sliding down slowly. But interest rates have a high relative content - that is relative to overseas and I think overseas interest rates will begin to go up. So if we stand still it is like a cut, from the RBA view.</p>
<hr>
<p><strong>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University</strong></p>
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<a href="https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40532/original/wrsybgsm-1391466111.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&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>No comment.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
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<a href="https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40535/original/nrn4sy3f-1391466291.jpg?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"></a>
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<p>No comment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40538/original/39x7rbz9-1391466355.jpg?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"></a>
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<p>Inflation for 2013 was 2.7%, which is slightly above the mid-point of the 2-3% target range. However, this is likely due to one-time effects of the depreciation in the Australian dollar from its record highs against the US dollar. As a result, inflation can be expected to run at the lower end of the target range in 2014 unless the dollar depreciates a lot further.</p>
<p>The policy rate should be returned to its neutral level over the medium term of one to two years. However, the RBA can continue to monitor the effects of low real interest rates on asset and housing prices before embarking on a tightening cycle.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/40541/original/shj27dsx-1391466678.jpg?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"></a>
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<p>Since the last RBA board meeting, the Australian economy has continued to flatline. Its major trading partners improved their growth only modestly, and it seems now that this trend will persist for some time. The trade weighted index has depreciated only a little. On the other hand, housing and share prices in Australia have continued to rise significantly, in part reflecting investor confidence about the future. </p>
<p>However, in the present, economic activity appears restrained and capacity utilisation is falling slowly. While the impact of changes to fiscal policy settings by the Abbott government remain unclear, consolidation in 2014 is quite likely. Therefore a zero real value for the cash rate seems appropriate for now.</p><img src="https://counter.theconversation.com/content/22704/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>Without a clear direction of where the Australian economy is heading, the consensus to keep the cash rate at its current level of 2.5% remains strong. Uncertainties surrounding the domestic and foreign…Timo Henckel, Research fellow, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/198262013-11-04T19:36:12Z2013-11-04T19:36:12ZHas the Australian economy turned the corner?<figure><img src="https://images.theconversation.com/files/34393/original/v5prxdnn-1383542003.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Data suggests a tentative economic improvement.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The balance of risks to Australia’s economy has barely shifted from last month, so that the consensus to keep the cash rate at its current level of 2.5% remains strong, according to Reserve Bank Shadow Board members.</p>
<p>The new coalition government has yet to announce any big policy surprises, the US government budget crisis has been deferred for a further four months (as widely expected), European economic growth remains subdued, and Asian economies are only slowing slightly.</p>
<p>Domestically, the signals are mixed. The Australian dollar remains relatively high while the real estate markets in the major cities appear to be responding to the low interest rates. </p>
<p>Inflation is well within the target range, the unemployment rate fairly stable around 5.6%, consumer and business confidence continue to improve, if only marginally. While a debt crisis in the US has been averted at the eleventh hour, the political problems leading to the stand-off remain. </p>
<p>Uncertainty about the US budget position is thus likely to resurface early next year. Germany’s economy is picking up slightly and there are green shoots in Spain and the UK. However, there is continued concern about the health of Europe’s banks. A stress test of 130 key European credit institutions, recently announced by the ECB, may reveal some unpleasant truths. </p>
<p>Asia is slowing slightly but not dramatically, as pointed out in the World Bank’s recent East Asia Pacific Economic Update, with China expected to hit the official growth target of 7.5% in 2013 and the rest of the region slowing to 5.2% before accelerating in 2014 and beyond. </p>
<p>The World Bank identifies an abrupt slowdown of investment in China as one of the immediate risks to the region’s economic prospects. The Shadow Board’s confidence in keeping the cash rate steady has strengthened a little, equalling 66% (up from 62% in October). The probability attached to a required rate cut now equals 5% while the probability of a required rate hike equals 29%. At longer horizons the following picture emerges: the probability that the cash rate should remain at 2.5% is 34%. </p>
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<p>The need for an interest rate increase is estimated at 46% (47% in October), for an interest rate cut at 20% (23% in October). A year out, the Shadow Board members attach a 56% probability to the need for an increase in the cash rate (down from 58% in October) and a 23% probability to the need for a decrease in the cash rate (down from 25% in October).</p>
<p><em>The 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>
<p><em>The project is designed to test and improve transparency of central bank deliberations by revealing the opinions of individual members, emphasising the underlying macroeconomic uncertainties.</em></p>
<p><em>[Professor Guay Lim](https://cama.crawford.anu.edu.au/rba-shadow-board](https://cama.crawford.anu.edu.au/rba-shadow-board) from the Melbourne Institute of Applied Economic and Social Research, Melbourne University, has replaced Mark Thirlwell from the Lowy Institute.</em></p>
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<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>Confidence continues to pick up and asset prices are rising strongly, partly reflecting Australia’s current very loose setting of local monetary policy. These improvements have come despite the Australian dollar remaining high. With the currency having remained high for many years, the shape of the economy appears to be adjusting to deal with a higher currency. </p>
<p>With the interest rate sensitive sectors of the economy picking up strongly, in response to the current cash rate setting, there would be little purpose in cutting the cash rate further. Indeed, cutting rates further could create other problems by increasing the risk of asset price misalignments. On the other hand, the case for lifting rates any time soon is also fairly weak at this stage, as inflation remains contained, the labour market remains loose and the Australian dollar is still high. </p>
<p>If the Federal Reserve does, however, begin to taper its quantitative easing program in coming months this should be expected to put some downward pressure on the Australian dollar at which point rate hikes may need to be considered to offset the upward pressure on inflation from a lower currency. I now see it as more likely than not that the cash rate will need to be higher than its current level in 12 months time.</p>
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<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<p>Currently the monetary policy dilemma is between exchange rate overvaluation versus asset price appreciation brought on by easy money. With housing prices continuing to increase in the US and issues with negative equity receding, the end of QE is hopefully nearer rather than further – however, with a dove as the likely new Fed Chair, that remains to be seen. All of which suggests a greater need to tighten rather than loosen within 12 months, though more than likely towards the end of that time frame rather than sooner.</p>
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<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA:</strong></p>
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<p>No comment.</p>
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<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<p>Currently the RBA still assessing sustainability of a post‐election bounce in business confidence, and in particular whether it translates into higher non‐mining business investment expectations – recent remarks by Deputy RBA governor Phil Lowe and RBA Governor Glenn Stevens suggest they haven’t detected any signs of the latter as year, but they won’t really know for sure until the release of the third quarter capex intentions survey at the end of this month. </p>
<p>The RBA doesn’t appear to be especially concerned as yet about rising house prices; while they seem now to be resigned to being unable to influence the value of the Australian dollar either through policy actions or “jawboning”.</p>
<p>On the six month outlook, with the assumption is that non‐mining business investment intentions will remain sluggish, unemployment will continue to rise (close to 6% by January or February) and the currency remains at elevated levels (likely if the Fed hasn’t started tapering QE by its late January meeting), the RBA may cut rates again at its February or possibly March meeting.</p>
<p>The 12 month outlook will mirror that of the six month outlook, more so with unemployment.</p>
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<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
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<p>No comment.</p>
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<p><strong>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University</strong></p>
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<p>No comment.</p>
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<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
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<p>No comment.</p>
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<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
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<p>Headline inflation remained within the target range at 2.2% in the third quarter, while the unemployment rate dropped a bit to 5.6% in September. So there is no compelling case for further cuts to an already low policy rate.</p>
<p>In terms of the timing of any increase in the policy rate, the current balanced economic conditions allow for further monitoring of property markets before taking action to dissipate the rising froth. However, if domestic and international economic conditions were to show more consistent signs of improvement, the policy rate should be returned to neutral in reasonably short order.</p>
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<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<p>Key macro variables in the Australian economy are remarkably stable ‐ for example, the trend in the unemployment rate is flattening at 5.7%; (workforce) participation is at 65%; the full‐time to part‐time employment ratio at 1.5; and trimmed CPI inflation is at 2.3%. </p>
<p>The RBA’s real trade‐weighted exchange rate is at around 160 (though declining a little recently, this will not stimulate non‐mining net exports much), while household saving rate at 11%; the terms of trade is sitting at 91, the ABS’s real unit labour cost is at 101. Real GDP growth is slowing marginally, and this is mainly due to the decline in public sector investment.</p>
<p>Domestic forward‐looking indicators are looking positive – for example, stock and housing prices are rising well in response to protracted easy monetary policy, and both business and consumer confidence have improved significantly in 2013. </p>
<p>Though unnecessary fiscal policy consolidation by the new Coalition government still remains a risk, I recommend making no change in the cash rate in November and giving a clear signal of gradually increasing rates in the next 12 months. This signal should be represented as less pressure on the accelerator, not as a braking of momentum.</p><img src="https://counter.theconversation.com/content/19826/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 balance of risks to Australia’s economy has barely shifted from last month, so that the consensus to keep the cash rate at its current level of 2.5% remains strong, according to Reserve Bank Shadow…Timo Henckel, Research fellow, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/148902013-06-03T20:37:31Z2013-06-03T20:37:31ZBoost growth, or counter a weaker dollar - which way should the RBA go?<figure><img src="https://images.theconversation.com/files/24905/original/74csc9zt-1370234558.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Over the next twelve months, the Shadow Board members attach a 40% probability that the cash rate will need to increase, slightly more than the probability that the cash rate needs to fall.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><figure class="align-right zoomable">
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<p>Whither the Aussie dollar? Since the RBA dropped the cash rate to 2.75% last month the Australian dollar has fallen to below 96 US cents, a depreciation of more than 7% against the US dollar. </p>
<p>With weaker data coming from China, India and Europe and mixed data coming from the US, the rapid fall in the Aussie dollar highlights the downside risks to the Australian economy, as perceived by the markets. Will the dollar slide further in anticipation of mounting downside risks, or will the current level suffice to boost Australian exports and breathe new life into the Australian economy?</p>
<p>The tug-of-war between the need to lower the cash rate due to sustained weakness in the Australian economy and the need to raise the cash rate in response to the expansionary stimulus emanating from the historically low cash rate and the weakened Aussie dollar, is clearly on the minds of the Shadow Board members. The strong consensus of the nine members is that the Reserve Bank of Australia should leave interest rates unchanged from May at 2.75%.</p>
<p>The probability that rates should rise in the next six months equals approximately 1/3, somewhat less than the risk that rates should be lower.</p>
<p>Over the next twelve months, the Shadow Board members attach a 40% probability that the cash rate will need to increase, slightly more than the probability that the cash rate will need to decrease. Overall, compared to previous months, there has been a small shift in favour of lower interest rates at the six-month and 12-month horizon, reflecting concerns about muted consumption, weaker global demand, falling commodity prices and tighter fiscal policy following a likely change of government later this year.</p>
<p><em>The 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>
<p><em>The project is designed to test and improve transparency of central bank deliberations by revealing the opinions of individual members, emphasising the underlying macroeconomic uncertainties.</em></p>
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<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>The significant depreciation of the Australian dollar over the past month should be both supportive of growth and shifts the balance of inflation risk to the upside. The looser financial conditions implied by the lower currency means that a further cash rate cut should be unnecessary at this stage. I recommend the cash rate is left unchanged at 2.75% this month.</p>
<hr>
<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<p>Recent weakness in the Australian dollar would suggest a pause in rate cuts. International data signals are mixed and market reactions complicating policymaking. Weakness in US GDP interpreted as reducing the likelihood of an earlier end to quantitative easing (QE) and thus strengthening asset markets being a case in point. One would suggest that in some QE countries asset price bubbles are becoming a serious issue - though the Fed has of course ignored these dangers in the past.</p>
<hr>
<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA:</strong></p>
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<p>No comment.</p>
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<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<a href="https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24871/original/rdmqfwsh-1370225820.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24872/original/zhnhgwwg-1370225821.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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 decline in the exchange rate since the last Board meeting reduces the pressure on the RBA to implement a second successive rate cut, while the data flow over the past month hasn’t presented any compelling rationale for a further rate cut.</p>
<p>The currency may not fall a lot further, while the economy is likely to remain sluggish and the incoming government will probably seek to tighten fiscal policy more than is currently planned.</p>
<hr>
<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24873/original/q5wxt7d3-1370225821.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24874/original/yzf35yhs-1370225822.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24875/original/prp6h74g-1370225822.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24876/original/9tnpk97t-1370225823.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24877/original/k4n8frf3-1370225823.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24878/original/jnmmtf7v-1370225824.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24879/original/hp9b87vv-1370225824.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24880/original/32mgn6wp-1370225825.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24881/original/4ycfpkk8-1370225825.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>With inflation at 2.5% and expected to remain within the target range of 2-3%, the real cost of borrowing is far below its neutral level. This risks propping up a housing market bubble, a collapse in which will become more difficult to address with monetary policy alone the longer it persists. Policy should focus on aggregate conditions and adjust back towards a more neutral stance over the medium term.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24882/original/mwvrhvw7-1370225826.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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 recent weakening in private sector investment (across all sectors) in Australia is not matched yet by demand increases elsewhere in the economy including the government sector. The trade-weighted exchange rate has depreciated 8% since mid- April, and alongside the positive outlook in Japan plus the gradually recovering global economy, Australian net exports should eventually improve. However there is a fair risk that the likely change in the Australian government will lead to even tighter fiscal policy. Thus I consider the current accommodative stance appropriate, and expect minor tightening to be required in six to 12 months, depending on the election outcome.</p>
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<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy:</strong></p>
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<p>No comment.</p><img src="https://counter.theconversation.com/content/14890/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>Whither the Aussie dollar? Since the RBA dropped the cash rate to 2.75% last month the Australian dollar has fallen to below 96 US cents, a depreciation of more than 7% against the US dollar. With weaker…Timo Henckel, Research fellow, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/139542013-05-06T20:54:25Z2013-05-06T20:54:25ZStay the course with interest rates: shadow board<figure><img src="https://images.theconversation.com/files/23258/original/qxqwyg2w-1367816949.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Down? Stay as it is? Commentators are divided about the direction of the cash rate.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The Reserve Bank of Australia should leave interest rates unchanged this month according to the consensus of Shadow Reserve Board members.</p>
<p>Amid market uncertainty over whether the RBA board may choose to cut Australia’s cash rates or maintain the current cash rate of 3.00%, some of the nine Shadow Board members see evidence for lower rates now, and in the future. </p>
<p>But others feel that a gradual tightening to a more neutral policy stance, following the recent period of monetary accommodation, remains the prudent path for Australia.</p>
<p>Retail data released by the Australian Bureau of Statistics showed spending fell 0.4% in March from February. But nevertheless it was slightly higher than expected over the March quarter. </p>
<p>Despite disagreement over the appropriate direction for interest rates in the future, support for holding rates this month remains strong at about 60%; the Reserve Bank of Australia should bide their time, and wait for stronger evidence.</p>
<p>Paul Bloxham, Chief Economist of HSBC Bank Australia said he believed lower rates could risk inflating “excessive growth” in housing prices, which <a href="http://www.rpdata.com/press_releases/aussie_housing_capital_values_soft_while_rents_up.html">have been flat</a> in most capital cities following a brief rally earlier this year. </p>
<p>Shadow Board member Professor Warwick McKibbin has also warned Australia risks a sharp exchange rate correction leading to a rebound in inflation if foreign investors lose their appetite for the Australian dollar, currently trading at 1.03 US cents. </p>
<p>Professor McKibbin said a softer currency would help sectors such as manufacturing, which according to <a href="http://www.aigroup.com.au/portal/site/aig/template.MAXIMIZE/mediacentre/?javax.portlet.tpst=0328197f3ace113a24afbc100141a0a0_ws_MX&javax.portlet.prp_0328197f3ace113a24afbc100141a0a0=index%3D2%26docName%3DAustralian%2BPSI%25C2%25AE%253A%2B%2BServices%2Bsector%2Bslips%2Bdeeper%2Binto%2Bthe%2Bred%2Bin%2BApril%26folderPath%3D%252FLIVE_CONTENT%252FMedia%2BReleases%252F2013%252FMay%252F%26viewID%3Dcontent&javax.portlet.begCacheTok=com.vignette.cachetoken&javax.portlet.endCacheTok=com.vignette.cachetoken">Australian Industry Group’s April Performance of Manufacturing Index (PMI)</a> slumped to the same levels experienced in the global financial crisis. </p>
<p>But he said it could also “raise imported inflation and push the inflation rate well above the target band, especially given the currently high rate of non-traded goods inflation”. </p>
<p>The CAMA Shadow Board is comprised of influential economists from the private sector and academia. They were asked to rank their preferred settings for the cash rate.</p>
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<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>Inflation is low enough to allow the RBA to cut rates further if needed. But rates are already very low and there are signs that monetary policy is working. Lower rates could also risk creating other problems, such as excessive growth in housing prices. While a further cut in rates could be needed to support growth at some point, I think there are enough signs that the setting of monetary policy is getting enough traction to warrant leaving the cash rate steady this month.</p>
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<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<a href="https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23222/original/5845x7ks-1367806215.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>Low inflation outcomes suggests little need for change to current settings at the May meeting. International factors currently seem stable, though unlikely that Europe will last another six months before the next country crumbles.</p>
<hr>
<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23223/original/bnvbdhy3-1367806335.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23225/original/xtjrrjw3-1367806370.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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 weakening economy has caused me to lower my expectations of future inflationary pressures and hence alter my longer term projections. However, I recommend retaining the current stance in May.</p>
<hr>
<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23226/original/dz2tn793-1367806439.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23227/original/25yjytyg-1367806460.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23228/original/6dmfcs3q-1367806524.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23229/original/mt3vrs82-1367806541.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23230/original/kgfvhx7h-1367806596.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23231/original/dt5hsp7h-1367806611.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>There are clearly weak patches in the Australian economy driven by a strong currency, high input costs, the end of the first stage of the resources boom and uncertainty about government policy. These factors together with a deteriorating fiscal position suggest greater future fiscal drag on the economy as the excessive spending which has driven structural fiscal deficits will have to be cut back. The economy is particularly vulnerable to an inconvenient set of conditions, some of which were preventable. There are many uncertainties for monetary policy to balance. </p>
<p>Apart from attempting to accommodate fiscal negligence and the uncertainty about the nature of policies generally after the September election, in the near term the major issue is whether foreign investors will continue to want to hold $A assets and therefore keep the exchange rate a high level. A loss of foreign investor appetite will cause a sharp exchange rate correction which, while good for some sectors of the economy, would raise imported inflation and push the inflation rate well above the target band especially given the currently high rate of non-traded goods inflation. </p>
<p>Cutting interest rates in the face of rising inflation of goods and/or asset prices would undermine monetary credibility and risks unhinging inflationary expectations. Holding interest rates is the least bad option in this complex environment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23232/original/ch3q3jfm-1367806698.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/23233/original/5pzmqsxd-1367806714.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>Inflation is slightly higher than last quarter, but is right in the middle of its target range at 2.5% (up from 2.2% in Q4 2012). Meanwhile, the unemployment rate increased from 5.4% to 5.6% in March. The weaker labour market conditions, due to less growth in employment than new participants in the labour force, remove any immediate tightening bias in monetary policy. However, the need to gradually adjust the policy rate back to its neutral level over the medium term remains in place, although any further weakening of the labour market should delay this adjustment.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<p>There were more signs in April that the long global growth slowdown will persist longer, particularly with China growing slower than many expected. This has affected commodity prices and thus consumer confidence in Australia. The small rise in unemployment to 5.6% and the fall in the participation rate to 65.1% were further signs of the continuing weak recovery here. </p>
<p>The Federal budget is due on May 13, and this may well have a contractionary effect if the government is determined to severely limit the expected deficit. However, given the coming election, it would be surprising if that remained true. Taking all of this into account, and noting that the real cash rate is 0.5%, monetary policy is sufficiently loose now to justify the highest probability recommendation of no change. Six months and one year out, the probabilities skew towards a slow improvement in conditions, and thus towards moderate increases in the interest rate towards its neutral value.</p>
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<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy:</strong></p>
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<p>No comment.</p><img src="https://counter.theconversation.com/content/13954/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shaun Vahey receives funding from the ARC via a Linkage grant, with the RBA as a partner organization.</span></em></p>The Reserve Bank of Australia should leave interest rates unchanged this month according to the consensus of Shadow Reserve Board members. Amid market uncertainty over whether the RBA board may choose…Shaun Vahey, Professor, ANU College of Business and Economics , Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/131742013-04-02T01:16:16Z2013-04-02T01:16:16ZRBA: rates should hold, with a gradual return to neutral<figure><img src="https://images.theconversation.com/files/21932/original/4vdqpz84-1364862832.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite continuing unrest in Europe - particularly Cyprus - the global economy has firmed, say Shadow Reserve Bank commentators.</span> </figcaption></figure><p>The consensus of the nine members of the Shadow Board is that the Reserve Bank of Australia should leave interest rates unchanged from March at 3.00%. But the balance of risks implies rates should rise within the next 12 months to return monetary policy to a neutral stance.</p>
<p>The probability that rates should rise in the next 12 months remains at around ½, exceeding the risk that rates should be lower, which is under 1/3.</p>
<p>Although domestic conditions have been relatively stable, political and fiscal turmoil in Europe continues. Recent US data indicate more promise of sustained economic growth. Gradual tightening to a more neutral policy stance, following the recent period of monetary accommodation, would be the prudent path for Australia, although not risk free.</p>
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<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>There have been further signs this month that low interest rates are supporting the economy, including improvements in consumer sentiment and the housing market. Despite some wobbles in Europe, associated with Cyprus, the global economy has generally shown further signs of improvement, led particularly by conditions in the US and China. Given this, there would little reason to consider shifting the Australian cash rate this month.</p>
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<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<p>Still considerable uncertainty about appropriate settings at the six to 12 month horizon with Europe finding new ways to antagonise markets and avoid solutions to ongoing problems. In other parts of the world the outlook is more stable, but weaker commodity prices will likely weaken output and employment growth over the next 12 months.</p>
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<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA:</strong></p>
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<img alt="" src="https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21923/original/jk8spqhy-1364861453.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21904/original/wr3rv78z-1364857362.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21924/original/m3xmps6p-1364861504.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21905/original/5q7p3hgj-1364857390.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21925/original/qjqkvdrj-1364861529.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21906/original/fpv5tqwb-1364857418.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21926/original/nvd3rqyh-1364861711.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21907/original/972t7789-1364857447.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21927/original/xgj83ypb-1364861741.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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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<p>There should be a gradual return to neutral. Domestic economic conditions remain quite stable with inflation at 2.2% and the unemployment rate at 5.4%. Despite ongoing political woes in the US and Europe, recent economic developments, especially in the US, suggest less risk for the Australian economy. Given this background, the policy rate should gradually be adjusted back to a more neutral level after the recent period of a more accommodative stance.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21908/original/2y9bpvkd-1364857484.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21928/original/y5y4bt8q-1364861774.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21909/original/9jzpc79r-1364857510.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
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<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21930/original/kg8wjwc5-1364861818.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>No comment.</p><img src="https://counter.theconversation.com/content/13174/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shaun Vahey receives funding from the ARC via a Linkage grant, with the RBA as a partner organisation.</span></em></p>The consensus of the nine members of the Shadow Board is that the Reserve Bank of Australia should leave interest rates unchanged from March at 3.00%. But the balance of risks implies rates should rise…Shaun Vahey, Professor, ANU College of Business and Economics , Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/126122013-03-05T00:55:19Z2013-03-05T00:55:19ZInterest rates should stay on hold, for now<figure><img src="https://images.theconversation.com/files/20917/original/2fvnrk57-1362440641.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A number of Shadow Bank commentators point to a slight uplift in the housing market as a sign that interest rates should rise in the medium term.</span> </figcaption></figure><p>No change remains the consensus of the nine members of the Shadow Board in the Reserve Bank of Australia holding interest rates unchanged from February at 3.00%. But rates need to rise significantly within the next 12 months. </p>
<p>The probability that rates should rise in the next six months remains at around 1/3, approximately matched by the risk that rates should be lower. </p>
<p>Although no Shadow Board members consider rates will need to drop by more than 75 basis points at that horizon, some see a risk that rates will need to rise by up to 150 basis points. </p>
<p>Over the longer term, in the next twelve months, the Shadow Board members anticipate that the probability of a rate increase is around ½, with the probability of a fall at around 1/3. </p>
<p>As in February, the Shadow Board’s aggregate view indicates an upward tilt in the path of interest rates will be required over the next year.</p>
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<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>This month brought further signs that already loose local monetary policy is getting some traction. Consumer sentiment bounced, the housing market continued to improve and the Australian equity market rose to a new 4 ½ year high. </p>
<p>Global economic indicators were also generally more positive and financial market sentiment remains significantly better than it was late last year, despite this month’s inconclusive Italian election results. </p>
<p>Forward-looking capital expenditure data provided further evidence that mining investment will continue to contribute to GDP growth for some time yet, which should give already low interest rates time to take effect and support re-balancing of Australia’s growth from being mining-led to non-mining-led. </p>
<p>I recommend the cash rate is left unchanged this month at 3.00%.</p>
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<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
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<p>While international factors seem to be settling down there are still potential downside risks emanating from Europe that might point to further falls in rates in 6-12 months. However it seems more likely that slow recovery in the real economy will continue, with interest rates being shifted towards more neutral levels.</p>
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<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA:</strong></p>
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<p>My assessment remains intact from last month.</p>
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<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia:</strong></p>
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<p>No comment.</p>
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<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology:</strong></p>
<p>No comment.</p>
<hr>
<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University:</strong></p>
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<a href="https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/20913/original/6vnk4hst-1362440184.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p>
<hr>
<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
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<p>Economic conditions remain about the same as the previous month. Inflation and the unemployment rate remain steady. An apparent improvement in the housing market supports a bias towards raising the policy rate in the medium term.</p>
<hr>
<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<a href="https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/20915/original/jv62j26w-1362440252.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>Little change is recommended this month. The only major news on risks is the ongoing failure in the US to avoid fiscal sequestration. Budget deficits now and into the near future have been cut by more than enough to control the US national
debt, but the long term problem from unsustainable entitlements on health and social security remains. This has only long term implications for the world economy.</p>
<p>Meanwhile, asset markets are leading the recovery in Australia, suggesting that previous cash rate cuts are working.</p>
<hr>
<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/20916/original/38hnk36p-1362440277.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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>No comment.</p><img src="https://counter.theconversation.com/content/12612/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shaun Vahey receives funding from the ARC via a Linkage grant, with the RBA as a partner organisation.</span></em></p>No change remains the consensus of the nine members of the Shadow Board in the Reserve Bank of Australia holding interest rates unchanged from February at 3.00%. But rates need to rise significantly within…Shaun Vahey, Professor, ANU College of Business and Economics , Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/119362013-02-04T04:44:48Z2013-02-04T04:44:48ZRate cut unlikely, but the forward path for interest rates will be up<figure><img src="https://images.theconversation.com/files/19838/original/w58gjqsp-1359941638.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A blunt instrument: the case for interest rates to rise is strengthened by rising unemployment and a persistently high Australian dollar which has defied previous cuts.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p><strong>The Shadow Reserve Board, an initiative of the Centre for Applied Macroeconomic Analysis (CAMA) made up of eminent industry and academic economists, returns this month.</strong></p>
<p>Reserve Bank of Australia board members should leave the cash rate unchanged at 3% tomorrow. But a persistently high Australian dollar and climbing unemployment could see rates trending upward in the next six to 12 months. </p>
<p>The Shadow Board assessed the probability that rates should be higher in six months at around 1/3, approximately balanced by the risk that rates should be lower.</p>
<p>In contrast, the <a href="http://cama.crawford.anu.edu.au/pro-pol/">nine experts on the Shadow Board</a> assessed the probability that rates should increase over the next twelve months at over ½, with just under 1/3 probability that rates should fall.</p>
<p>Although there is greater uncertainty about interest rates in the longer term, the balance of risks has shifted towards higher rates in the future.</p>
<p>University of Tasmania Professor Mardi Dungey noted that “the blunt instrument of monetary policy will not achieve redistribution between areas which are doing better than others”.</p>
<p>ANU Professor Warwick McKibbin said holding interest rates too low risked “distorting the allocation of capital towards more speculative investments that eventually cause a problem during an unwinding of the policy”.</p>
<p>He argues: </p>
<blockquote>
<p>The task of adapting to the changing nature of the commodities boom should be a combination of increased flexibility in the economy, particularly labor markets, to allow the private sector to adjust and a gearing up of government infrastructure spending at historically low costs of borrowing in order to facilitate private sector investments to emerge over time. </p>
</blockquote>
<p>However, HSBC economist Paul Bloxham said “very timely indicators of conditions suggest that monetary policy is working, with consumer sentiment rising in recent weeks and housing prices also edging upwards”. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/19822/original/y2r22bcf-1359936903.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<hr>
<p><strong>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</strong></p>
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<p>Since the last meeting there has been a distinct improvement in financial market sentiment, largely reflecting improved global conditions. A number of the key global down-side risks to growth have been reduced, with the US fiscal cliff issue having been somewhat resolved and markets no longer pricing a significant risk of a break-up of the euro. </p>
<p>Global monetary policy has loosened further, with Japan extending its quantitative easing programme and adopting an inflation target. Most importantly for Australia, the economic upswing in China has gathered further momentum and industrial commodity prices have risen solidly as a result.</p>
<p>Locally, much of the official data have been on the weaker side, but, critically, they almost all pre-date the RBA’s last cut and certainly pre-date its impact. Very timely indicators of conditions suggest that monetary policy is working, with consumer sentiment rising in recent weeks and housing prices also edging upwards. </p>
<p>The government’s pre-Christmas announcement, that it is no longer committed to pursuing a budget surplus in 2012/13, also means that fiscal policy is likely to be looser than the board had previously anticipated. </p>
<p>While inflation remains well contained for the moment, local monetary and fiscal policy settings and the global environment are already conducive for a pick up in Australian growth. I recommend the cash rate is held steady at 3.00%.</p>
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<p><strong>Mark Crosby, Dean of the Global MBA Program, Acting Dean of the Global BBA Program, and Professor of Economics, S P Jain Center of Management in Singapore:</strong></p>
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<p>No comment.</p>
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<p><strong>Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA</strong></p>
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<p>The domestic economy remains weaker than desirable. However, the economy does not appear to be in immediate danger of a recession. The blunt instrument of monetary policy will not achieve redistribution between areas which are doing better than others. It is important that the economy retains some room to move interest rates downwards in the future, and retains positive real interest rates at this stage. Thus my recommendation is that the policy stance remains unchanged this month.</p>
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<p><strong>Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia</strong></p>
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<p>Current: Having cut rates in December, and given that February is a short month, the RBA can probably afford to wait for more information as to the condition of the economy at the end of 2012 and the beginning of 2013 before deciding on their next move. </p>
<p>The international climate appears to have improved since the December meeting: commodity prices are higher, the US avoided going over the “fiscal cliff” (albeit that the New Year’s Eve “deal” nonetheless embodies a significant amount of fiscal tightening), “tail risks” in Europe appear to have diminished, and the Chinese economy is picking up. Against that, the Australian dollar is still “uncomfortably high”, and there have been a number of major layoff announcements which along with other indicators of softness in hiring intentions signals a rise in unemployment in the months ahead.</p>
<p>Six-months: Persistent strength in the exchange rate and rising unemployment warrant rates being lower than present levels by June.</p>
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<p><strong>Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology</strong></p>
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<p>No comment.</p>
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<p><strong>Warwick McKibbin, Chair in Public Policy in the ANU Centre for Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy at the Australian National University</strong></p>
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<p>There are two main reasons why interest rates should not be reduced any further and should probably rise over the year. First, moving interest rates below 3% during a global shift in portfolio preference towards Australia will not result in the usual stimulus to the Australian economy because the exchange rate channel is being diminished through external forces. </p>
<p>The task of adapting to the changing nature of the commodities boom should be a combination of increased flexibility in the economy, particularly labor markets, to allow the private sector to adjust and a gearing up of government infrastructure spending at historically low costs of borrowing in order to facilitate private sector investments to emerge over time. </p>
<p>Monetary policy is not the correct instrument for a structural adjustment and excessively low interest rates risk distorting the allocation of capital towards more speculative investments that eventually cause a problem during an unwinding of the policy.</p>
<p>Second, it is important to keep in mind that the appropriate nominal interest rate for an economy with low inflation and low unemployment is thought by many to be the nominal growth rates plus a few percent, interest rates are already too low in the Australian economy given the aggregate economic outcomes with nominal growth at least at 5%. Current interest rates are well below this rule of thumb.</p>
<p>There are real risks in the global economy. The largest is Europe followed by a crisis in global bond markets as major central banks unwind their quantitative easy policies that have highly distorted bond rates to a point that has caused asset price bubbles to sprout in emerging market economies that are adopting the monetary policies of the core economies.</p>
<p>Monetary policy in Australia should be focused on what is happening now and in this country and be ready to respond if needed when the next crisis occurs.</p>
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<p><strong>James Morley, Professor, University of New South Wales, CAMA:</strong></p>
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<p>Conditions balanced, policy accommodative: The unemployment rate is still reasonably low at 5.4% and inflation is in the middle of the target range of 2-3%. Thus, there is no strong impetus for an immediate change in the policy rate in either direction. However, policy is quite accommodative and policymakers will have to start thinking about returning policy to neutral over the medium term.</p>
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<p><strong>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</strong></p>
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<p>The cash rate was cut four times in 2012, mostly based on the possible implications of various uncertainties such as the euro area crisis, the US fiscal cliff, the Chinese slowdown, and the Australian government’s planned fiscal consolidation. </p>
<p>All of these problems would appear to have eased, if not fully resolved. Meantime inflation is well within the target band, output growth is close to normal (though slowing a little), unemployment has risen a small amount though the unemployment gap is probably steady, hours worked is also steady, there are signs of improvement in productivity, and share and house prices have begun to strengthen. </p>
<p>All of this does not provide a case for further fine-tuning cuts in the cash rate now, which is at a 30-year low. Any cuts may feed unnecessary pessimism about the Australian economy.</p>
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<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy</strong></p>
<p>No comment.</p>
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<p class="fine-print"><em><span>Shaun Vahey receives funding from the ARC via a Linkage grant, with the RBA as a partner organisation.</span></em></p>The Shadow Reserve Board, an initiative of the Centre for Applied Macroeconomic Analysis (CAMA) made up of eminent industry and academic economists, returns this month. Reserve Bank of Australia board…Shaun Vahey, Professor, ANU College of Business and Economics , Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.