No need for early 2018 rate change

Share Canberra's trusted news:

AUSTRALIAN interest rates should remain at record lows in early 2018 but the economy may need higher interest rates by the middle of the year, according to the ANU RBA Shadow Board. 

Dr Timo Henckel
The board of the Reserve Bank of Australia (RBA) will hold its first meeting for 2018 on Tuesday (February 6) to review official interest rates, which have been at a record low of 1.5 per cent since August 2016.

Chair of the RBA Shadow Board Dr Timo Henckel said inflation rose slightly to 1.9 per cent in the last quarter of 2017, the Australian dollar has traded above 80 US cents, but wages growth still remains weak in Australia, pointing to the need for interest rates to remain steady.

“Otherwise favourable economic data, both domestic and overseas, has convinced the RBA Shadow Board that there is no chance a further reduction in interest rates could be called for,” Dr Henckel said.

“Instead, it attaches a 63 per cent probability that holding interest rates steady at 1.5 per cent is the appropriate setting, while the confidence in a required rate hike equals 37 per cent.

“Looking to mid-year and the year end, there is a slight shift in the Shadow Board’s assessment in favour of higher interest rates.”

Dr Henckel said the latest figures still put nominal wages growth at just 2.0 per cent, which remains a problem for the economy.

“The sustained weak real wage growth increasingly becomes a problem as economic growth is not generating additional purchasing power, and thus consumption demand, for a large section of the population. It is also leaves household balance sheets vulnerable in light of their high leverage,” he said.

Globally, he said the World Bank has revised its growth forecast for 2018 upward, to 3.1 per cent, while the IMF expects the world economy to grow 3.9 per cent in 2018 and 2019.

“These numbers are bolstered by favourable readings of key global economic data such as investment growth, trade growth, financial conditions, improvements in fiscal sustainability, etc,” Dr Henckel said.

“However, there clearly remain downside risks in the form of over-indebtedness, both public and private, and a reduction in the potential growth rate.

“Geopolitical tensions have thankfully subsided, at least for the moment. There remains a real risk of an abrupt correction to inflated asset prices worldwide and the concomitant economic disruptions.”

Dr Henckel said the RBA Shadow board attached a 63 per cent probability that holding rates steady was the appropriate setting for February, compared to 60 per cent in December.

He said there was a zero probability of a rate cut (1 per cent in December), while confidence in a needed rate hike was 37 per cent compared to 39 per cent in December.

In the longer term, the probability for a needed rate hike in six months was 71 per cent compared to 69 per cent in December, while the probability of a needed rate hike in 12 months was 81 per cent (76 per cent in December.)

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.

 

Dr Henckel’s full commentary is available via cama.crawford.anu.edu.au/rba-shadow-board.

Who Can You Trust?

In a world beleaguered by spin and confused messages, there's never been more need for diverse, trustworthy, independent journalism in Canberra.

Who can you trust? Well, for more than 25 years, "CityNews" has proudly been an independent, free, family-owned news magazine, serving the national capital with quality, integrity and authority. Through our weekly magazine and daily through our digital platforms, we constantly and reliably deliver high-quality and diverse opinion, news, arts, socials and lifestyle columns.

If you trust our work online and believe in the power of independent voices, I encourage you to make a small contribution.

Every dollar of support will be invested back into our journalism so we can continue to provide a valuably different view of what's happening around you and keep citynews.com.au free.

Click here to make your donation and you will be supporting the future of journalism and media diversity in the ACT.

Thank you,

Ian Meikle, editor

Previous articleCoe announces new shadow ministry
Next articleArts / Men’s Choir kicks off with open night

Leave a Reply