This group of economists thinks the RBA should hike interest rates tomorrow

Felix Kunze/Redferns
  • The Reserve Bank of Australia (RBA) hasn’t raised official interest rates since late 2010.
  • The ANU’s Shadow RBA Board believe the optimal level for interest rates is now 1.75%, above the 1.5% level where the cash rate currently sits.
  • Most economists and those in financial markets don’t believe the cash rate will change until 2019 at the earliest.

The Reserve Bank of Australia (RBA) hasn’t raised official interest rates since late 2010.

Most economists think that record run without a rate hike will extend well into next year, mirroring similar sentiment from financial markets who don’t have a full 25 basis point increase priced in for at least another 12 months.

However, if the Australian National University’s (ANU) RBA Shadow Board is on the money, a rate increase could come as soon as tomorrow.

Yes, tomorrow.

“The RBA Shadow Board attaches a 49% probability that holding interest rates steady is the appropriate setting, while the confidence in a required rate hike has increased for the fourth month in a row, to 51 per cent,” said Dr Timo Henckel, Chair of the RBA Shadow Board.

“Thus, the Shadow Board finds that a rate increase of 25 basis points is most likely the best setting, if only by a small margin.”

This chart from the ANU shows the optimal cash rate setting indicated by its members in the latest survey.

Source: ANU

Henckel says while inflation remains in check and unemployment is steady, reports suggesting the federal budget and fiscal policy will be more expansionary than first thought have increased the likely need for a rate rise.

“Attention now focuses on the budget,” Henckel says. “Given the consolidation of the Australian economy, an expansionary budget will heighten the need for an interest rate increase.”

Based on casting votes from the Shadow RBA Board, it found that the probability for rate hike within six months was unchanged from when it last met in April, ascribing a 76% probability.

The likelihood that rates will sit at 1.5% in six months times was seen as 21%, while the need for rate cut over the same period stood at just 4%.

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 includes Professor Bob Gregory and Professor Warwick McKibbin, who have both served on the RBA Board, along with Paul Bloxham of HSBC, Dr Mark Crosby, Professor Guay Lim of the University of Melbourne, James Morley of University of New South Wales, Jeffrey Sheen of Macquarie University, Professor Mardi Dungey of University of Tasmania and John Romalis, Professor of economics at the University of Sydney.

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Gregory and Romalis did not vote in the latest survey.

The ANU says the Shadow Board uses probability to determine the optimal setting of interest rates ahead of monthly RBA Board meetings.

If the actual RBA board were to lift interest rates tomorrow it would come as a major shock to most observers, especially as the RBA tends to signal an impeding change in the cash rate to ensure no undesirable economic or financial market outcomes result.

In the past, it has used policy speeches, along with its quarterly statement on monetary policy (SoMP), to signal to markets, households and business that interest rates are likely to change.

This week markets will not only receive its May interest rate decision, but also a speech from Governor Philip Lowe and its May SoMP, including new forecasts for GDP growth and inflation.

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