As lockdown lifts, rates should stay put

Despite Victoria’s success in containing COVID-19 and lifting stage-four restrictions, interest rates should stay at the historically low of 0.25 per cent, according to The Australian National University’s Shadow RBA.

In its latest vote, the Board favours a rate hold – but only just.  

The Shadow Board is 56 per cent confident that keeping the cash rate on hold is the right policy. The Board’s conviction a rate cut is needed is 44 per cent, while its confidence in a rate hike is 0 per cent.  
 
“Easing of restrictions, especially in Victoria, might improve the ABS unemployment rate currently at 6.9 per cent,” Shadow Board member Dr Timo Henckel said.

“However, the labour market, and the economy more generally, remain fragile.”  

The biggest concern for the global economic outlook is the dramatic worsening of COVID-19, particularly in the US, Europe and South Asia.  

“With a vaccine still months away, the prospects of a swift economic rebound are rapidly diminishing,” Dr Henckel said.  

“Two weeks ago the International Monetary Fund projected that global GDP will contract by 4.4 per cent as a consequence of the pandemic. The US presidential election could also end up being a source of instability for the global community.”  

Back home, Dr Henckel says the Federal Budget “remains expansionary” however “tax cuts disproportionately benefit middle and higher income households which is likely to generate less economic stimulus than if they target low income households.”  

“Looking ahead six months, the Shadow Board’s vote in favour of keeping the cash rate steady at 0.25 per cent is only just passing at 56 per cent,” Dr Henckel said. 

“The probability attached to a required increase is 3 per cent and a required decrease is 41 per cent.” 

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’s full commentary is available online.