Case for keeping rates low remains strong: Shadow RBA – ANU

With Australia’s economy remaining fragile due to COVID-19, the official cash rate should remain on hold for now, according to The Australian National University’s Shadow RBA Board.

For a fifth month in a row, the Shadow Board’s view on a possible change to the official cash rate remains the same.

The Board is 94% confident that keeping interest rates at 0.25 per cent is the right policy.

In contrast, the Board is six per cent confident that a final rate cut, to zero per cent, is appropriate.

Shadow Board chair Dr Timo Henckel says while Australia appears to have weathered the COVID-19 crisis exceptionally well, the stage 4 restrictions in Victoria have put a dampener on this success.

“It’s clear the economy is still a long way from returning to normal,” Dr Henckel said.

“The official unemployment rate – a key factor – ticked up again in July, to 7.5 per cent, the highest jobless rate since October 2001.

“Our overall fiscal stance should become clearer once the new budget is announced on 6 October.”

As is the case in Australia, the outlook for the world economy looks very uncertain.

“The pandemic is still in full swing, and countries’ reactions to any second waves of infection are likely to be less stringent,” Dr Henckel said.

“Adding to the uncertainty, geopolitical tensions between China and the West are not showing signs of easing. Tit-for-tat diplomacy is a real cause for concern.”

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.

Read the RBA Shadow Board’s latest commentary here.