No cut in the cash rate today amid cloudy outlook: shadow RBA board

The predominating view among the self-appointed ‘shadow RBA board’ was for the RBA to leave the cash rate on hold today.

However, the latest survey of shadow board members cash rate forecasts reveals considerable uncertainty about where interest rates may be heading over the next six to 12 months.

Unlike other economist surveys, the shadow board – comprising the views of industry and academic economists under the banner of the Centre for Applied Macroeconomic Analysis at Australian National University (ANU) and released on The Conversation – does not provide actual forecasts.

Instead members attach weightings to various interest rate settings.

The latest survey find the likelihood of interest falling over the next six months slightly higher than them rising with almost equal weighting attached to cash rates of 2.5% and 2.75%, with smaller weightings to 3% and 2.25%

Over the 12 month forecast, a cash rate of 2.5% receives the highest weighting, but with also strong leanings towards cash rates of 2.25%, 2.75%, 3% and 3.25%.

“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,” writes Timo Henckel, research fellow at the Centre for Applied Macroeconomic Analysis at Australian National University (ANU).

Shadow board member Saul Eslake, chief economist at Bank of America Merrill Lynch Australia, says 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”.

“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,” he adds.

Shadow board member Mark Crosby, associate professor at Melbourne Business School argues similarly that “recent weakness in the Australian dollar would suggest a pause in rate cuts”.

“International data signals are mixed and market reactions complicating policy making.

“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,” he says.

The shadow board comprises nine members:

• Shaun Vahey, Professor, RSE, ANU. (non-voting chair)
• Paul Bloxham, Chief Economist (Australia & New Zealand), HSBC Bank Australia Ltd
• 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
• Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA
• Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia
• 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
• Warwick McKibbin, Professor, RSE, ANU, CAMA
• James Morley, Professor, University of New South Wales, CAMA
• Jeffrey Sheen, Professor & Head, Department of Economics, Macquarie University,Editor, The Economic Record, CAMA
• Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy