RBA shadow board: "rates might rise"

by Rebecca Pike30 Apr 2018

Interest rates could rise when the Reserve Bank of Australia (RBA) meets today (1 May).

While the rate has been held at a record low of 1.5% since August 2016, there is mixed opinion on what the decision will be.

Even the members of the Australian National University (ANU) RBA Shadow Board are divided on whether keeping rates steady, or a rate hike, is the right thing to do.

Chair of the RBA Shadow Board Dr Timo Henckel said while inflation remains in check and unemployment is steady, reports suggesting the federal Budget and fiscal policy will be more expansionary than first thought have increased the likely need for a rate rise.

Experts from elsewhere believe the rate will stay the same again. Steve Mickenbecker, Canstar group executive, financial services, thinks the RBA will need to see wage growth before it bumps up the rates.

Henckel said nearly half the shadow board agree, but there is slightly more confidence in a hike. He added, “The RBA Shadow Board attaches a 49% probability that holding interest rates steady is the appropriate setting, while the confidence in a required rate hike has increased for the fourth month in a row to 51%.

“Thus, the Shadow Board finds that a rate increase of 25 basis points is most likely the best setting, if only by a small margin.

“Attention now focuses on the budget. Given the consolidation of the Australian economy, an expansionary budget will heighten the need for an interest rate increase.

“Yields on Australian 10-year government bonds have continued their recent gentle decline, but have risen from approximately 2.6% at the end of March to above 2.8%. This increase may well be a reflection of the market taking note of recent comments by the RBA that interest rate increases are probably in the pipeline, even if not in the immediate future.”

Canstar’s Mickenbecker said, “An inflation rate below the target range makes for extending the record run at 1.5%, with the RBA highly unlikely to move the cash rate this May.

“The RBA will want to see wages growth before it bumps up rates, to give borrowers margin to meet higher repayments.  The numbers are going to have to show wage increases to go with the jobs growth we are already seeing.

“Pressure will start to mount later in the year as US rate increases impact wholesale funding markets. 

“Irrespective of the RBA’s decision, there may still be May rate action. With APRA unwinding the 10% growth cap on investment lending, the banks will be under pressure to hand back some of the increases passed through to investors last year.”

Australia last experienced a rise in official interest rates on 3 November 2010, when the cash rate rose 0.25 points to 4.75%.

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at the ANU Crawford School of Public Policy. It brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behaviour.

The RBA Shadow Board includes Professor Bob Gregory and Professor Warwick McKibbin, who have both served on the RBA Board.

 

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