Cash rate should stay low despite eased lockdown

As Australia’s economy starts to cautiously reopen, The Australian National University’s RBA Shadow Board is calling for the cash rate to remain on hold for months to come.

Their statement comes ahead of the official cash rate announcement on Tuesday 2 June.

The Shadow Board has pointed to the overall weakness in the economy and uncertainty surrounding the short-term future as the key motivators for keeping interest rates unchanged.

RBA Shadow Board Chair, Dr Timo Henckel, says the group’s conviction that the cash rate should stay at the historic low of 0.25 per cent remains unchanged from last month, at 94 per cent.

“This is despite states being able to ease restrictions sooner than expected and the Government spending $60 billion less on initiatives like JobKeeper than originally anticipated,” Dr Henckel said.

“The Australian economy still faces major and ongoing challenges.

“The unemployment rate spiked to 6.2 per cent in April, less than expected.

“But a significant further increase is expected for May. The increase in unemployment, however, masks the overall drop in employment of nearly 600,000 as the labour force participation rate dropped from 66 to 63.5.

“Many other economic indicators are not very helpful in the current climate as a guide for policy, as they are severely lagging.”

As many other nations start to reopen their economies, the possible knock-on effects of the global recession remain a worry, according to Dr Henckel.

“Of particular concern to Australia are the current tensions with China that have seen an 80 per cent tariff raised on Australian barley and threats of further trade restrictions,” he said.

“Estimates of global economic growth remain fragile, reflecting uncertainty about how the economy responds and whether COVID-19 can be successfully contained.”

Looking ahead six months, the Shadow Board’s confidence the cash rate should remain at 0.25 per cent is 91 per cent.

While a year out, their confidence the cash rate should stay on hold is unchanged at 84 per cent.

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.