tag:theconversation.com,2011:/au/topics/shadow-board-4507/articlesShadow Board – The Conversation2015-11-03T04:51:05Ztag: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/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>
<hr>
<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>
<hr>
<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/425462015-06-01T02:07:57Z2015-06-01T02:07:57ZInterest rates should fall no further: RBA Shadow Board<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set. Timo Henckel is the non-voting chair of the Board.</em></p>
<hr>
<p>The RBA’s decision to cut the cash rate to 2% last month went against the recommendation of the CAMA RBA Shadow Board. Since then economic data continues to show signs of weakness. Unemployment is up slightly, investment down, and consumer and business confidence remain fragile. </p>
<p>The international economy continues to pose a threat to the Australian economy and inflation remains comfortably within the RBA’s target band. But asset prices, Sydney house prices in particular, continue to post high gains. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm but believes the cash rate has bottomed and an increase is due in the near future. In particular, the Shadow Board recommends the cash rate be held at its current level of 2%; it attaches a 60% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals a mere 2%, while the confidence in a required rate hike stands at 38%.</p>
<p>According to the Australian Bureau of Statistics, Australia’s jobless rate edged up to 6.2% in April. Worryingly, in the same month full-time employment, total employment and the participation rate have fallen. Wage growth remains at a record low: the Australian wage price index increased by 2.3% in the last quarter, well below the average of 3.5% for the period 1998-2015.</p>
<p>The Australian dollar remains range-bound between US76¢ and US80¢. Yields on Australian 10-year government bonds have increased further, to 2.84%, from its recent low of 2.59%, implying a steepening of the yield curve, normally a bullish sign.</p>
<p>Regional housing markets, particularly Sydney and Melbourne, and domestic share prices remain buoyant. This remains a primary concern for many Shadow Board members as the asset price increases coincide with an increase in private sector leverage, leading to misallocated investment and opening up the possibility of a costly price correction. According to the Reserve Bank of Australia total housing credit grew by 7.2% (year-ended) in April 2015, compared to 6% in April 2014.</p>
<p>The international economy remains subdued. For Europe, a noticeable pickup in growth is not on the horizon, at least not until the Greek debt crisis is resolved. Recent revisions of US data indicate that US growth this year has been slower than initially thought, with some analysts suggesting the US economy actually contracted in the first quarter. Without a string of good news about the US economy, the Federal Reserve Bank’s increase of the cash rate is likely to be pushed back ever more. Commodity prices are likely to remain soft and possibly fall further.</p>
<p>Consumer and producer confidence measures continue to be mixed. However, of particular concern is the outlook for domestic investment. The ABS survey of chief financial officers conducted in April and May of this year reveals that total capital expenditure is still expected to fall significantly, with the current estimate for fiscal year 2015-16 being 24% less than the corresponding estimate for fiscal year 2014-15. The trend volume estimate for total new capital expenditure fell 2.3% in the March quarter 2015 while the seasonally adjusted estimate fell 4.4%.</p>
<h2>What the Shadow Board believes</h2>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level of 2% equals 60%. The confidence that a rate cut is appropriate is a mere 2%, whereas the Shadow Board considers it much more likely (38%) that a rate increase, to 2.25% or higher, is the appropriate policy decision for this month.</p>
<p>The probabilities at longer horizons are as follows: six months out, the estimated probability that the cash rate should remain at 2% equals 23%. The estimated need for an interest rate increase lies at 76%, while the need for a rate decrease is estimated at 3%. </p>
<p>A year out, the Shadow Board members’ confidence in a required cash rate increase equals 81%, in a required cash rate decrease 2% and in a required hold of the cash rate 17%.</p>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“The case for a cut or cuts in the near future does not seem to be as strong as in past months.”</strong></p>
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<p>Further signs that the economy is not weakening further, so that the case for a cut or cuts in the near future does not seem to be as strong as in past months. Still uncertainty on the global front, with the ever present possibility that Greece may finally default. But does not seem that would have longer term effects on global economies. As a result the longer term outlook would be for a start towards rate normalisation within 12 months.</p>
<hr>
<p>Mardi Dungey, Professor and Deputy Head, School of Economics and Finance at University of Tasmania:</p>
<p><strong>“I recommend that a higher policy rate should have been maintained.”</strong></p>
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<p>The RBA’s decision to ease monetary policy in May - the timing of which was partly to meet the “challenges of communication” (RBA Minutes of Board Meeting for May 2015) associated with the timing of the Federal Budget - is a gamble
that accommodative monetary policy can overcome the problems of the inactive role fiscal policy is currently playing in macro policy making. As there seem to be few signs of improvement on the fiscal front, the RBA is taking a risk that looser monetary policy can fill part of this role and not cause structural problems elsewhere. </p>
<p>The Board meeting minutes make clear that most domestic conditions are if anything only a little weaker than in previous months; and there is considerable uncertainty as to whether consumption will respond similarly to that experienced in pre-crisis conditions – given the rather nasty scare experienced by many in the economy, it seems unlikely we will seem this type of response to lower rates. </p>
<p>More likely is that looser credit will inflate house prices – an area where the fiscal reform agenda could make substantial improvements by removing a number of incentives to over-invest in housing. Given the hand that the RBA has been played, it is not unreasonable that they chose to move rates. However, if all arms of policy were playing a role in active economic management this would not be the path I would recommend. </p>
<p>For that reason, my recommendations are based on the presumption that monetary policy cannot reasonably be expected to manage single-handed and that it is able to follow its usual best-practice course in setting policy in partnership with other arms of policy making, in which case I recommend that a higher policy rate should have been maintained.</p>
<hr>
<p>Warwick McKibbin, Chair in Public Policy, ANU Centre for Applied Macroeconomic Analysis (CAMA) , Crawford School of Public Policy at Australian National University:</p>
<p><strong>“The distortion low interest rates is causing in asset markets is worsening.”</strong></p>
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<p>Continued weakness in nominal GDP growth in Australia implies that the neutral policy interest rate continues to fall. However, evidence of rising asset prices, particularly in the housing markets of Sydney and Melbourne, makes the setting of interest rates increasingly complex. From the point of view of short term macroeconomic factors, low interest rates in Australia could be justified; however, the distortion this is causing in asset markets is worsening. </p>
<p>This highlights the difficult trade-off between short term growth and medium term vulnerability. My judgement is that the damage caused by a painful adjustment in the housing market and the high levels of leverage by households in an environment of a downward adjustment in trend economic growth is a dangerous mix that loose monetary policy and even more financial leverage cannot solve. Add to this situation, the move to normalise interest rates in the US and there are many bad scenarios for Australia that are plausible. </p>
<p>I recommend leaving interest rates unchanged (indeed I would not have lowered them to the current level). Monetary policy should be focused on medium term stability especially if it has little prospect of solving the problems that cause weak short term demand. There is strong evidence that a point have been reached where monetary policy cannot offset the core problems caused by uncertainty about economic and political prospects in the Australian economy. </p>
<p>The lack of substantial policy assistance from fiscal rebalancing or substantive economic reform generally, is increasingly backing the Reserve Bank into a corner. It appears that many politicians do not appreciate the risks that now face the Australian economy. No wonder investment is weak and uncertainty is damaging economic prospects in Australia. It may be that the optimistic projections in the recent federal budget turn out to be correct, however, the vulnerabilities within the Australian economy are growing and lower interest rates without
any other policy response makes this situation worse.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“The RBA has scope to hold the policy rate steady.”</strong></p>
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<p>The relatively stimulative federal budget and the recent lower level of the Australian dollar mean that the RBA has scope to hold the policy rate steady this month and even start raising it back to its neutral level over the medium term.</p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The cut in the cash rate to 2% in May was the right move.”</strong></p>
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<p>In my opinion, the cut in the cash rate to 2% in May was the right move. My expectation is that it should remain at this level until at least early 2016. The net saving glut in Australia continues to be a problem. Consumption growth is unlikely to contribute much to growth normalisation because of the relatively high levels of household debt. Growth recovery will have to come largely from business investment, which unfortunately shrank badly in the March quarter and continues surprisingly in waiting mode, despite low interest rates. </p>
<p>The proposed federal budget in May 2015 turned less austere than anticipated, reducing one obstacle to the return to normal growth. The 20% trade-weighted exchange rate depreciation over the last 24 months will help growth recovery
by boosting non-mining exports, but this boost should continue for a while to be more than cancelled by the falling value of mining exports. </p>
<p>Overall, upside inflation risk remains minimal since wages growth is modest and energy prices are unlikely to rise much. The outlook for Greek debt negotiations looks grim, with possible negative ramifications for global asset markets. Therefore, the Australian economy needs its current monetary policy push to remain for some time yet, and needs a stronger fiscal push.</p><img src="https://counter.theconversation.com/content/42546/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR).</span></em></p>Last month’s cash rate cut should not be repeated, say the majority of Reserve Bank Shadow Board members.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/411632015-05-04T02:54:16Z2015-05-04T02:54:16ZStill no clear direction for economy: RBA should hold<p>Economic data is once again painting a motley picture of the Australian economy. Slight improvements in the labour market, stronger commodity prices, and a headline inflation rate near the centre of the official target band opposes weakening consumer sentiment and a deterioration of the international economy. Appreciable risks exist on both the upside and the downside. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm but still considers it necessary that the cash rate is lifted in six-12 months. In particular, the Shadow Board recommends with confidence that the cash rate be held at its current level of 2.25%; the Board attaches a 67% 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 stands at 20%.</p>
<p>Australian Bureau of Statistics figures shows Australia’s jobless rate fell slightly to 6.1% in March, accompanied by a marginal increase in employment and the participation rate. Wage growth remains muted.</p>
<p>The Australian dollar rebounded from its recent low and now fetches close to 80 US cents. Yields on Australian 10-year government bonds have also rebounded from a recent low to 2.59%. Both these developments suggest markets are cautiously optimistic about Australia’s near economic future.</p>
<p>Sydney’s housing market and domestic asset prices remain buoyant.</p>
<p>International conditions are deteriorating somewhat. European growth remains soft. A Greek default in the near future is a real possibility, along with a concomitant shock to the European financial system. China is looking to curtail the adverse consequences of excessive private debt. </p>
<p>Recent statistics from the US are showing a weaker than expected first quarter of economic activity. Consequently, the Federal Reserve Bank may delay increasing its cash rate. On the plus side, international commodity prices have rebounded slightly, benefiting Australia’s mining companies.</p>
<p>Confidence measures continue to be mixed. Consumer confidence slipped further, with the Westpac Consumer Sentiment Index coming in at 96.2 this month (99.47 in the previous month). Capacity utilisation is virtually unchanged. Coming off a recent high, the services PMI dropped slightly, from 51.70 in February to 50.2 in March. Business confidence, as reported by the National Australia Bank, increased from its temporary low of 0 to 3.</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 2.25% is up three percentage points, to 67%. The confidence that a rate cut is appropriate has fallen from 16% in April to 13%; the Shadow Board considers it more likely (20%, up from 19% in April) that a rate increase, to 2.5% or higher, is the appropriate policy decision for this month.</p>
<p>The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2.25% equals 29% (down from 31% in April). The estimated need for an interest rate increase lies at 55% (up from 53%), while the need for a rate decrease is estimated at 16% (unchanged). </p>
<p>A year out, the Shadow Board members’ confidence in a required cash rate increase equals 65% (up two percentage points), in a required cash rate decrease 16% (unchanged) and in a required hold of the cash rate 19% (down five percentage points).</p>
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<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80210/original/image-20150504-23877-1en8jnw.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>
<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
<p><strong>“A key question is over-inflating asset markets.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80194/original/image-20150504-23842-160fh2w.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/80195/original/image-20150504-23884-jfeqdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80195/original/image-20150504-23884-jfeqdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80195/original/image-20150504-23884-jfeqdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80195/original/image-20150504-23884-jfeqdc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80195/original/image-20150504-23884-jfeqdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80195/original/image-20150504-23884-jfeqdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80195/original/image-20150504-23884-jfeqdc.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/80193/original/image-20150504-23838-12kjn3l.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80193/original/image-20150504-23838-12kjn3l.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80193/original/image-20150504-23838-12kjn3l.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80193/original/image-20150504-23838-12kjn3l.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80193/original/image-20150504-23838-12kjn3l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80193/original/image-20150504-23838-12kjn3l.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80193/original/image-20150504-23838-12kjn3l.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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<p>Underlying inflation is steady and, at around 2.4%, it is still comfortably in the target band, albeit in the lower half. This suggests that demand has held up relative to supply in the economy, although growth is probably still a bit below trend. At the same time, a number of indicators of domestic economic conditions have lifted in the past month, including retail sales and employment, suggesting that the domestic momentum may be picking up, rather than slowing. Local asset prices have also remained buoyant and Sydney housing price growth still appears excessive. </p>
<p>The Australian dollar has appreciated over the past month, but this partly reflects rising commodity prices. On balance, the economic information that has arrived over the past month has been more positive for Australia. There also remains a key question about whether further easing of monetary policy could over-inflate asset prices, particularly given the continued exuberance in parts of the housing market. I recommend the cash rate is left on hold at 2.25% this month.</p>
<hr>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“There is strong case for raising rates at the 12 month horizon.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80196/original/image-20150504-23856-dgvplj.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/80197/original/image-20150504-23845-1fassz.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80197/original/image-20150504-23845-1fassz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80197/original/image-20150504-23845-1fassz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80197/original/image-20150504-23845-1fassz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80197/original/image-20150504-23845-1fassz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80197/original/image-20150504-23845-1fassz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80197/original/image-20150504-23845-1fassz.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/80198/original/image-20150504-23877-y8jgxg.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80198/original/image-20150504-23877-y8jgxg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80198/original/image-20150504-23877-y8jgxg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80198/original/image-20150504-23877-y8jgxg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80198/original/image-20150504-23877-y8jgxg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80198/original/image-20150504-23877-y8jgxg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80198/original/image-20150504-23877-y8jgxg.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>With the markets anticipating delays in increased official rates in the US it would seem wise for the RBA also to stay lower for longer, with raises in the rates risking appreciation of the dollar and further weakening the economy. At the 12 month horizon there still seems to be a strong case for raising rates closer to neutral.</p>
<hr>
<p>Warwick McKibbin, Professor, RSE, ANU, CAMA:</p>
<p><strong>“The RBA faces a difficult choice.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80201/original/image-20150504-23842-aub2k1.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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<img alt="" src="https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80200/original/image-20150504-23845-439swg.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/80199/original/image-20150504-23893-4lhkdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80199/original/image-20150504-23893-4lhkdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80199/original/image-20150504-23893-4lhkdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80199/original/image-20150504-23893-4lhkdc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80199/original/image-20150504-23893-4lhkdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80199/original/image-20150504-23893-4lhkdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80199/original/image-20150504-23893-4lhkdc.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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<p>Cutting interest rates will likely further inject a bubble into asset markets which will lead to high economic costs when the policy unravels. Ultra low interest rates are not a substitute for dealing with the structural adjustment that the Australian economy needs to undertake. </p>
<p>The longer that economic reform is postponed through political stalemate the more difficult the job of monetary policy will become. The ultimate questions for the RBA are: what is the objective of the current policy and what will be the most likely ultimate outcome of continually lowering interest rates in the current economic environment? </p>
<p>Is the goal to drive the economic adjustment to the commodity price decline or is it to buy time by artificially stimulating asset values in the economy to sustain demand until the politicians that are blocking needed economic reform realize the folly of their actions? It may be possible for the RBA to drive the adjustment but it is more likely that it can only postpone a structural slowdown. </p>
<p>Creating a significant mis-allocation of capital in an economy that will ultimately need major structural adjustment, while perhaps attractive in the short term, will likely create a proliferation of problems that will converge at some point in the not too distant future. My view is the RBA should hold its ground and focus attention on highlighting the fundamental economic problems that other policies need to address. </p>
<p>Perhaps with luck, ultra-low interest rates might bridge the policy vacuum created by parliament. But the more likely outcome is that cutting interest rates further without other policy support, will ultimately create another painful economic adjustment that Australia did not need to have.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“The RBA should not lower the policy rate to drive down the dollar.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80202/original/image-20150504-23887-tqkyxe.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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<img alt="" src="https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80203/original/image-20150504-23877-1625p41.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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<img alt="" src="https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80204/original/image-20150504-23871-kn6yph.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>Despite the recent fall in headline inflation to 1.3%, underlying inflation remains within the target range at 2.3%. Meanwhile, the latest unemployment rate is 6.1%, which is down from its recent peak at 6.4%.</p>
<p>These conditions suggest that the RBA should hold the policy rate steady at the very low level of 2.25%, with concerns about an overstimulated housing market implying a tightening bias going forward.</p>
<p>The recent partial recovery of the Australian dollar largely reflects better external conditions for the export sector. Therefore, the RBA should not lower the policy rate to drive the dollar down.</p>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“RBA has the scope to cut the cash rate.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80206/original/image-20150504-23842-1o5j6eh.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/80207/original/image-20150504-23845-18ipex8.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80207/original/image-20150504-23845-18ipex8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80207/original/image-20150504-23845-18ipex8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80207/original/image-20150504-23845-18ipex8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80207/original/image-20150504-23845-18ipex8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80207/original/image-20150504-23845-18ipex8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80207/original/image-20150504-23845-18ipex8.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/80205/original/image-20150504-23856-9d7kl0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/80205/original/image-20150504-23856-9d7kl0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80205/original/image-20150504-23856-9d7kl0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80205/original/image-20150504-23856-9d7kl0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80205/original/image-20150504-23856-9d7kl0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80205/original/image-20150504-23856-9d7kl0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80205/original/image-20150504-23856-9d7kl0.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 am marginally in favour of a cut in the cash rate because of the relatively weak outlook. My focus this month is on the following:</p>
<ul>
<li>Commodity prices remain depressed, and this problem will not change soon.</li>
<li>The Commonwealth budget in May is likely to feature consolidation proposals.</li>
<li>The US economy has temporary slowed its growth in the winter quarter, and the Federal Reserve is unlikely to raise its funds rate until at least later this year.</li>
<li>The increasing risk of failure of the negotiations on Greek sovereign debt is a threat to financial market stability in Europe and beyond.</li>
<li>CPI inflation in Australia for the March quarter is (temporarily) very low at 1.3% largely due to falling fuel costs.</li>
<li>Wages, vacancy and employment growth remain modest in Australia.</li>
<li>House price inflation may be a risk (mainly in Sydney), but this is investor-led and thus likely to encourage construction activity. </li>
</ul>
<p>Overall, I think the RBA has the scope to cut the cash rate this month, and possibly again later in the year. If next year’s circumstances warrant it, normalisation of the cash rate can then begin from a lower base.</p>
<hr>
<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set. Timo Henckel is the non-voting chair of the Board.</em></p>
<p><em>See all the Board’s April deliberations <a href="https://cama.crawford.anu.edu.au/rba-shadow-board/outcome/2015-04">here</a>.</em></p><img src="https://counter.theconversation.com/content/41163/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>Economic data is giving a mixed picture on whether the Reserve Bank should cut rates, but on balance, RBA members should hold.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/397782015-04-07T02:47:55Z2015-04-07T02:47:55ZFinancial markets expect a cut, but RBA Shadow Board says hold<p>Financial markets are pricing in a 75% chance of a rate cut when the RBA meets, which would be its second such move this year. </p>
<p>However, the CAMA RBA Shadow Board advises against this. The central dilemma for the RBA persists: spur growth with loose monetary policy and risk exaggerated asset prices that lead to a misallocation of capital and costly adjustment in the future, or hold the line on monetary policy and risk an imminent weakening of aggregate demand. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm but still considers it necessary that the cash rate is lifted in six-12 months. In particular, the Shadow Board recommends with confidence that the cash rate be held at its current level of 2.25%; the Board attaches a 64% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 16%, while the confidence in a required rate hike stands at 19%.</p>
<p>Australia’s jobless rate, according to the Australian Bureau of Statistics, edged down to 6.3% in February, due both to an increase in employment and a marginal decline in the participation rate. There are no signs that wage growth is wakening from its torpor, making it unlikely that consumer spending will pick up significantly.</p>
<p>The Aussie dollar continued to slide and now fetches about US75¢. As yields on Australian 10-year government bonds are now down to 2.35%, barely 40 basis points higher than for US Treasuries, global investors will search for yield elsewhere. A further decline of the Aussie dollar may well be on the cards.</p>
<p>Sydney’s inflated housing market remains cause for concern, as prices rose 3.3% month-on-month in March alone. The local stock market is also performing strongly, the ASX200 closing at 5900 just before Easter.</p>
<p>Global weakness and uncertainty keep battering the domestic economy. European growth remains soft while Germany is searching for solutions to the Greek debt crisis. Brazil is faltering and Russia, suffering from weak energy prices and political scandals, is experiencing a dramatic slowdown. China will aim for an annual growth rate of 7%, in line with previous announcements, while the US economy continues to expand modestly. The Federal Reserve Bank’s rhetoric points to a measured increase in the cash rate in the near future.</p>
<p>Confidence measures continue to be mixed. Consumer confidence slipped marginally, with the Westpac Consumer Sentiment Index coming in at 99.47 this month (100.7 in the previous month). Capacity utilisation edged up from 79.94% in January to 80.42% the following month. </p>
<p>The manufacturing PMI increased to 46.29 in March from 45.51 in February, while the services PMI advanced significantly, from 49.50 index points in January to 51.70 index points in February, the highest in more than a year. At the same time business confidence, as reported by the National Australia Bank, decreased to 0, the lowest in more than a year.</p>
<h2>What the CAMA Shadow Board believes</h2>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level of 2.25% is unchanged at 64%. There is far less confidence (16%, up from 14% in March) that another rate cut is appropriate whereas the Shadow Board considers it more likely (19%, down from 22% in March) that a rate increase, to 2.5% or higher, is the appropriate policy decision for this month.</p>
<p>The probabilities at longer horizons are as follows: six months out, the estimated probability that the cash rate should remain at 2.25% equals 31% (unchanged from March). The estimated need for an interest rate increase lies at 53% (down from 56%), while the need for a rate decrease is estimated at 16% (up from 13%). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 63% (down one percentage point), in a required cash rate decrease 16% (up four percentage points) and in a required hold of the cash rate 24% (down two percentage points).</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77138/original/image-20150407-26502-chnnyu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="license">Author provided</span></span>
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<figure class="align-center ">
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<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77139/original/image-20150407-26473-f7eboj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
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<h2>Comments from Shadow Reserve bank members</h2>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Monetary policy in Australia is loose enough.”</strong></p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77141/original/image-20150407-26476-1byscwi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<img alt="" src="https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77140/original/image-20150407-26518-6m8buk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Ongoing uncertainty in the global economy continues to dominate the outlook, with uncertainty around Greece and Europe, and China being the most important factors affecting monetary policy. The most likely outcome is that Greece will continue to
muddle through, and China will find a way to achieve near 7% GDP growth in 2015, so that monetary policy in Australia is loose enough at present settings. Worsening in the global outlook should see further rate cuts, while ongoing stability should see the RBA looking to normalise rates early in 2016.</p>
<hr>
<p>Warwick McKibbin, Professor, RSE, ANU, CAMA</p>
<p><strong>“The RBA faces a difficult choice.”</strong></p>
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<img alt="" src="https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77144/original/image-20150407-26473-87ny5s.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Cutting interest rates will likely further inject a bubble into asset markets which will lead to high economic costs when the policy unravels. Ultra low interest rates are not a substitute for dealing with the structural adjustment that the Australian economy needs to undertake. The longer that economic reform is postponed through political stalemate the more difficult the job of monetary policy will become. The ultimate questions for the RBA is what is the objective of the current policy and what be the most likely ultimate outcome of continually lowering interest rates in the current economic environment? </p>
<p>Is the goal to drive the economic adjustment to the commodity price decline or is it to buy time by artificially stimulating asset values in the economy to sustain demand until the politicians that are blocking needed economic reform realize the folly of their actions? It may be possible for the RBA to drive the adjustment but it is more likely that it can only postpone a structural slowdown. </p>
<p>Creating a significant misallocation of capital in an economy that will ultimately also need significant structural adjustment while perhaps attractive in the short term, will likely create a proliferation of problems that will converge at some point in the not too distant future. My view is the RBA should hold its ground and focus attention on highlighting the fundamental economic problems that other policies need to address. </p>
<p>Perhaps with luck, ultra-low interest rates might bridge the economic vacuum created by parliament. But the more likely outcome is that cutting interest rates further without other policy support, will ultimately create another painful economic adjustment that Australia did not need to have.</p>
<hr>
<p>John Romalis, Professor of Economics at the University of Sydney:</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77148/original/image-20150407-26518-1m1lmg0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><strong>“Potential costs down the line.”</strong></p>
<p>Although economic activity and inflation are likely to remain subdued in the near term, we have to wonder whether the short-term benefits of any additional monetary stimulus are sufficient to offset any potential costs down the line stemming from rapid increases in property rises in some markets.</p>
<hr>
<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set. Timo Henckel is the non-voting chair of the Board.</em> </p>
<p><em>See all the Board’s April deliberations <a href="https://cama.crawford.anu.edu.au/rba-shadow-board/outcome/2015-04">here</a>.</em></p><img src="https://counter.theconversation.com/content/39778/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR).</span></em></p>Financial markets have factored in a cut to Australia’s cash rate, but economists - including the CAMA Shadow Board - aren’t so sure.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/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/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>
</figcaption>
</figure>
<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">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<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">
<figcaption>
<span class="caption"></span>
</figcaption>
</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">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<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">
<figcaption>
<span class="caption"></span>
</figcaption>
</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">
<figcaption>
<span class="caption"></span>
</figcaption>
</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">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<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">
<figcaption>
<span class="caption"></span>
</figcaption>
</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">
<figcaption>
<span class="caption"></span>
</figcaption>
</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>
<span class="caption"></span>
</figcaption>
</figure>
<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 ">
<img alt="" src="https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73411/original/image-20150302-16175-ohhz8f.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/73412/original/image-20150302-16157-1j2ncz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73412/original/image-20150302-16157-1j2ncz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73412/original/image-20150302-16157-1j2ncz2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73412/original/image-20150302-16157-1j2ncz2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73412/original/image-20150302-16157-1j2ncz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73412/original/image-20150302-16157-1j2ncz2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73412/original/image-20150302-16157-1j2ncz2.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/73413/original/image-20150302-16172-mwkeu5.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73413/original/image-20150302-16172-mwkeu5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73413/original/image-20150302-16172-mwkeu5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73413/original/image-20150302-16172-mwkeu5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73413/original/image-20150302-16172-mwkeu5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73413/original/image-20150302-16172-mwkeu5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73413/original/image-20150302-16172-mwkeu5.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>
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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/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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<a href="https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70716/original/image-20150201-25933-1udml9u.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>“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>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70730/original/image-20150201-25912-1iipdld.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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<a href="https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70740/original/image-20150201-25933-f9wfbi.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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<a href="https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70713/original/image-20150201-25933-nvf6c5.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>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>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70737/original/image-20150201-25942-hv92se.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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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70728/original/image-20150201-25942-756kz9.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/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70721/original/image-20150201-25912-5ly0mg.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>“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>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70735/original/image-20150201-25933-1j9yrt0.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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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70726/original/image-20150201-25930-1jazb4n.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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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70723/original/image-20150201-25930-dwfhng.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>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>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70736/original/image-20150201-25914-137019v.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>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/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>
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<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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<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>“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>
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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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<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>
<hr>
<p>After lingering around the US93 cents mark for several months, the Aussie dollar recently depreciated by approximately US5 cents, while other domestic and international economic data continues to be mixed. This fall should help stimulate and rebalance the domestic economy, but to what extent is uncertain. </p>
<p>The CAMA RBA Shadow Board recommends the cash rate remain at its current level, yet there is growing confidence that it ought to be raised in 6-12 months. The Board attaches a 71% probability that the cash rate ought to remain at 2.5% in October. The confidence attached to a required rate cut equals 4%, while the confidence in a required rate hike has increased to 25%.</p>
<p>The aberrant spike in Australia’s unemployment rate in July 2014 has been reversed, but slack in the labour market remains (the unemployment rate equals 6.1%). Wage pressure is therefore not a serious concern.</p>
<p>There is no new inflation data available. However, should the Aussie dollar’s relative weakness persist, this will add inflationary pressures to the domestic economy. Business indicators are weaker, with the NAB business confidence, the manufacturing PMI, and the Westpac consumer confidence index all deteriorating slightly. </p>
<p>Estimates of GDP growth are largely unchanged. The construction industry is still responding positively to the housing boom. Increased military and security expenditures will put pressure on the federal government’s bottom line while key budget measures have yet to secure passage through the Upper House.</p>
<p>The foreign exchange market has come out of hibernation during the past few weeks. The Aussie dollar lost US5 cents, partly due to the relative strength of the US dollar, partly due to retreating commodity prices. A weaker dollar ought to help boost non-mining exports; however, weaker commodity prices will hurt the mining sector.</p>
<p>The global economy is not faring as well as hoped. US GDP growth looks solid but falling inflation expectations raise the spectre of deflation and may point to future economic weakness. The Chinese economy is slowing; this is acknowledged by Chinese policy makers, along with the need to restructure and rebalance the Chinese economy. </p>
<p>Uncertainty about Chinese growth and official announcements to aim for more ambitious CO2 emission reductions point to sustained weakness of commodity prices and Australia’s terms of trade. News of Europe’s economies is not good as several Eurozone countries are flirting with recession. The military efforts in the Middle East, along with heightened security measures, will likely drag the global economy down.</p>
<hr>
<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>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/60849/original/79r657xf-1412567226.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/60849/original/79r657xf-1412567226.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60849/original/79r657xf-1412567226.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60849/original/79r657xf-1412567226.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60849/original/79r657xf-1412567226.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60849/original/79r657xf-1412567226.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60849/original/79r657xf-1412567226.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/60850/original/7p56vfqs-1412567253.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/60850/original/7p56vfqs-1412567253.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60850/original/7p56vfqs-1412567253.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60850/original/7p56vfqs-1412567253.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60850/original/7p56vfqs-1412567253.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60850/original/7p56vfqs-1412567253.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60850/original/7p56vfqs-1412567253.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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<img alt="" src="https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60851/original/wpjvhvjq-1412567510.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>
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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/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>
<hr>
<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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<a href="https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24865/original/wxybx4w9-1370225818.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/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24866/original/23gggy2b-1370225818.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>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>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24868/original/p87432yd-1370225819.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24868/original/p87432yd-1370225819.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/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24869/original/ftdzdwr2-1370225820.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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<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/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/24870/original/jtnfmfw6-1370225820.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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<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>
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<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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<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>
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<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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<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>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>
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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 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/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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<a href="https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21913/original/fc562f37-1364857838.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21913/original/fc562f37-1364857838.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-center ">
<img alt="" src="https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21937/original/4m76f89w-1364865289.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>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21901/original/69b2jqgx-1364857218.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/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21914/original/k49tc76g-1364858044.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 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>
<hr>
<p><strong>Mark Crosby, Associate Professor, Melbourne Business School:</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21902/original/jfjd3bfk-1364857264.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 ">
<img alt="" src="https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21922/original/dbddyfxv-1364861416.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>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>
<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/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21903/original/j6gfbk2n-1364857301.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>
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</figure>
<figure class="align-right ">
<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">
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<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>
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<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">
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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/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>
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</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>
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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/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>
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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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<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>
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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>
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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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<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>
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<p>No comment.</p>
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<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy:</strong></p>
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<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>
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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/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>
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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>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>
<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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<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>
<hr>
<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>
<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/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/19832/original/mgb7mbzs-1359937684.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 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>
<hr>
<p><strong>Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy</strong></p>
<p>No comment.</p>
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</figure><img src="https://counter.theconversation.com/content/11936/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 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.tag:theconversation.com,2011:article/114122012-12-27T22:17:20Z2012-12-27T22:17:20Z2012, the year that was: Business and Economy<figure><img src="https://images.theconversation.com/files/18916/original/3cqqwh95-1355889400.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Re-run: if the US fiscal cliff has the same feel as last year's debt ceiling crisis, we're not surprised…</span> </figcaption></figure><p>Different year, same crisis. Around this time last year, the United States was looking down the barrel of economic disaster with the debt ceiling. As we approach 2013, it peers over the fiscal cliff. </p>
<p>That feeling has characterised 2012. Events from 2011 - such as the Eurozone sovereign debt crisis - have continued their relentless rush this year, morphing into other deeper consequences. </p>
<p>While last year entire nations stood on the brink (and continue to), this was the year when citizens bore the brunt of austerity cuts they were told they must endure. </p>
<p>While banks finally now feeling the consequences of activities which took the global economy to the brink, there is a feeling that despite doling out record-breaking fines, regulators seem unable to fully grapple with reforming a global system utterly divorced from the <a href="https://theconversation.com/in-the-libor-scandal-where-were-the-regulators-11300">public good</a>, writes UNSW Professor of Law, Justin O'Brien. </p>
<blockquote>
<p>“The societal cost of the break between stated and lived values exposed in the Libor scandal poses a series of fundamental questions. Can corporate culture be regulated? If so, should it? How does one ensure the continuing accountability of regulatory intervention?”</p>
</blockquote>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Barclays boss Bob Diamond and the LIBOR rigging affair.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>And at home, a reality check: Australia is not immune to the global conditions. </p>
<p>Falling commodities prices and declining tax revenues has already pushed some debt-saddled states to begin deep - and unpopular - cost cutting measures, while the Federal Government has finally abandoned its dogged pursuit of a budget surplus. </p>
<p>These changing times will test the mettle of Australia’s mining barons, <a href="https://theconversation.com/the-floating-fortunes-of-our-iron-ore-barons-9392">wrote Jason West</a>.</p>
<blockquote>
<p>History is replete with entrepreneurs who saw opportunity and invested their personal wealth and reputation at a critical period but failed to adjust when the global economy shifted.</p>
</blockquote>
<p>This year was also the year of a deepening <a href="https://theconversation.com/topics/productivity">productivity debate</a>, further emphasis on <a href="https://theconversation.com/topics/tax">tax reform</a> - including calls for a change to the GST and corporate tax rates - and some hard thinking about our manufacturing industry. </p>
<p>UTS Professor Roy Green, who headed the Prime minister’s Manufacturing Taskforce <a href="https://theconversation.com/the-blueprint-for-a-smarter-australia-starts-with-manufacturing-8900">saw positivity</a>; others took a more hard-headed approach, particularly to the car industry. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Covetous: Gina Rinehart moved on Fairfax.</span>
</figcaption>
</figure>
<p>And it was also the year of mining barons coveting media interests and <a href="https://theconversation.com/death-by-1-900-cuts-will-quality-journalism-thrive-under-fairfaxs-new-model-7734">hard decisions for Australia’s media</a>.</p>
<p>For The Conversation, a pivotal piece by founder Andrew Jaspan, ‘<a href="https://theconversation.com/fairfax-or-gina-fax-lets-have-the-debate-before-its-over-7721">Fairfax or Gina-fax? Let’s have the debate before it’s over</a>’ helped to further cement our presence and kicked off one of our most <a href="https://theconversation.com/topics/future-of-media">important series</a>.</p>
<p>Also grappling with technology advances, Australian retailers could no longer ignore the online revolution that was threatening to leave it behind.</p>
<p>Irrespective of the politics which surround it, Julia Gillard’s misogyny speech, as it’s come to be known, was a game-changer which has galvanised public debate on women in leadership positions.</p>
<p>Readers of The Conversation’s business section will already be familiar with this debate, from new research on <a href="https://theconversation.com/exploring-the-use-of-quotas-for-women-in-leadership-roles-6864">quotas</a>, <a href="https://theconversation.com/its-still-a-long-way-to-the-top-for-australias-working-women-11024">an examination of women on boards and in executive positions</a>, the <a href="https://theconversation.com/when-wages-negotiable-women-readily-make-pay-deals-11033">good news</a> and <a href="https://theconversation.com/a-lose-lose-proposition-whats-really-happening-when-women-negotiate-6215">the bad</a>.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Julia Gillard’s misogyny speech galvanised attention for women in leadership.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Earlier this year <a href="https://theconversation.com/for-women-to-have-it-all-we-have-to-change-the-way-we-work-8096">Eva Cox</a> responded to a controversial story in The Atlantic magazine by Anne-Marie Slaughter titled 'Why women still can’t have it all’. Economists know that there are always scarce resources, Cox wrote:</p>
<blockquote>
<p>“…but why are women of child bearing age still having to limit their choices? All we ask is that our choices were not constrained by gender, which seems a feasible aim.”</p>
</blockquote>
<p>This year, The Conversation collaborated with the Centre for Applied Microeconomic Analysis (CAMA) to publish the monthly deliberations of its <a href="https://theconversation.com/topics/shadow-reserve-bank">Shadow Board</a>, made up of academic and practising economists, prior to the Reserve Bank of Australia’s board meeting. This is much more than the familiar guessing exercise we see in the media: as ANU Professor Shaun Vahey explains, the study is an “exercise in control, not forecasting”. </p>
<blockquote>
<p>It aims to resolve two outstanding issues: first, can individual Board members quantify their uncertainty about the appropriate target cash rate with probabilities?</p>
<p>Second, can the risks envisaged by individual decision-makers be aggregated to give a collective view about the appropriate cash rate?“</p>
</blockquote>
<p>Finally, it’s always fraught picking favourites but these particularly grabbed us this year:</p>
<p><a href="https://theconversation.com/obamas-fiscal-grand-bargain-is-a-great-betrayal-of-americas-most-vulnerable-11128">Obama’s fiscal ‘grand bargain’ is a great betrayal of America’s most vulnerable</a>: As the fiscal cliff looms, American exceptionalism may have reached its economic limits. This piece is a sharp analysis on how America’s most vulnerable risk being betrayed by a fiscal cliff deal.</p>
<p><a href="https://theconversation.com/video-series-some-sports-economics-8248">VIDEO SERIES: Some Sports Economics</a>: An entertaining series that combines sports and first-year microeconomics.</p>
<p><a href="https://theconversation.com/lets-turn-it-up-to-11-why-audio-quality-loses-out-in-the-loudness-wars-9359">Let’s turn it up to 11: why audio quality loses out in the loudness wars</a> uses Keynesian economics to illustrate market failure in the long-running "loudness wars” between record companies. A cracking read with a counter-intuitive premise: that technology has made sound quality more inferior over time.</p>
<p>Thanks to all our authors for the thought-provoking analysis, opinion and research we have published this year. We believe it has added much-needed depth the debate. And, of course, thanks to all our readers - we’ve had a cracking year. </p>
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<p><strong>Top five stories of the year:</strong></p>
<p><a href="https://theconversation.com/fairfax-or-gina-fax-lets-have-the-debate-before-its-over-7721">Fairfax or Gina-fax? Let’s have the debate before it’s over</a></p>
<p><a href="https://theconversation.com/malcolm-fraser-does-it-matter-who-owns-our-papers-yes-it-does-7738">Malcolm Fraser: Does it matter who owns our papers? Yes it does</a></p>
<p><a href="https://theconversation.com/killing-the-kodak-moment-is-the-iphone-really-to-blame-4879">Killing the Kodak moment … is the iPhone really to blame?</a> </p>
<p><a href="https://theconversation.com/iron-ore-prices-continue-to-fall-but-is-it-really-time-to-panic-about-china-9339">Iron ore prices continue to fall, but is it really time to panic about China?</a></p>
<p><a href="https://theconversation.com/the-anatomy-of-the-resource-boom-tells-us-its-only-going-to-get-better-for-taxpayers-10314">The anatomy of the resource boom tells us it’s only going to get better for taxpayers</a></p><img src="https://counter.theconversation.com/content/11412/count.gif" alt="The Conversation" width="1" height="1" />
Different year, same crisis. Around this time last year, the United States was looking down the barrel of economic disaster with the debt ceiling. As we approach 2013, it peers over the fiscal cliff. That…Helen Westerman, Business + Economy EditorLicensed as Creative Commons – attribution, no derivatives.