The Australian National University’s RBA Shadow Board says official interest rates should remain at the new record low of 1.25 per cent set last month.
Ahead of the Reserve Bank of Australia’s official cash rate announcement today, the RBA Shadow Board is 48 per cent confident the overnight interest rate should remain unchanged.
The Board attaches a 30 per cent probability that a further rate cut, to 1 per cent, is appropriate and a 21 per cent probability that a rate rise, to 1.5 per cent or higher, is the right call.
ANU RBA Shadow Board member Dr Timo Henckel said weak growth in full-time employment was a significant concern, despite unemployment sitting at 5.2 per cent.
“Full-time employment has increased slightly, while part-time employment increased by nearly 40,000 between May and June,” Dr Henckel said. “The rising labour force participation rate is a good sign.
“However, there is growing evidence that the relatively high part-time employment rate in Australia reflects significant under-employment as well as a high casualisation of the workforce.
“Neither is helping to boost private consumption expenditure, which remains subdued.”
Dr Henckel cited weak growth in real wages as another cause for concern.
“Since inflation fell to 1.3 per cent, real wage growth has accelerated to 1 per cent,” Dr Henckel said.
“While positive, this number still falls short of the long-run average and what is required to sustain a healthy expansion of household consumption expenditure.
“And Australia’s inflation rate of 1.3 per cent remains well below the RBA’s official target of 2 to 3 per cent.”
Global economy “a real risk”
The RBA Shadow Board also noted the ongoing US-China trade war was casting a cloud over Australia’s economic prospects.
“The global economy remains a significant source of uncertainty and poses a genuine risk to the Australian economy,” Dr Henckel said.
“Recent statements by US President Donald Trump during the G20 meeting in Osaka sound a little more conciliatory. But clearly, for global growth not to suffer, a lasting deal between the two trading partners is needed.
“Added to this, ever-growing household and government debt worldwide is putting the brakes on spending and leaving governments with little room to move in the face of a possible recession.”
Six to 12-month forecast
Looking forward six months, the RBA Shadow Board attaches a 23 per cent probability the official cash rate should remain at 1.25 per cent.
The appropriateness for an interest rate cut in the same period stands at 42 per cent, while the probability attached to a required increase equals 35 per cent.
The numbers for a year out paint a similar picture.
The RBA Shadow Board members’ confidence that the cash rate should be held steady equals 17 per cent, while the confidence in a required cash rate decrease equals 38 per cent. A required cash rate increase in 12 months sits at 44 per cent.
The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy.
The Board brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behaviour.
