SHADOW RBA: Even with 1.5% inflation, the chances of a rate cut are tiny

The decision to cut, raise or leave rates is one the RBA makes each month and it’s a complex one involving where the economy is, where it’s been and where it’s headed.

More often than not the RBA chooses to sit pat and do nothing.

So, it’s hardly remarkable that Australia’s Shadow RBA board, a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at the ANU Crawford School of Public Policy, says the RBA should hold rates steady at tomorrow’s August board meeting.

But given that one of the primary mandates of the RBA, agreed by exchange of letters between the RBA governor and treasurer, is that “the appropriate target for monetary policy is to achieve an inflation rate of 2–3 per cent, on average, over the cycle,” it is somewhat remarkable that the Shadow RBA board “found only six per cent probability of the need for a further rate cut, down two points in the month.”

RBA Shadow board chair Dr Timo Henckel said “while official inflation came in at 1.5 per cent for the June quarter, well below the RBA’s target band of two to three per cent, the RBA Shadow board on balance prefers to hold firm on interest rates.”

Markets are taking a small bet that rates will move sometime later this year but Westpac chief economist Bill Evans wrote in his Australia and New Zealand weekly on Friday that by the end of the year, the RBA “is likely to have adopted a lower trend growth assumption (say 2.5–2.75%)”.

“Even with a further downward revision to the growth forecast in 2016, from 3% to 2.75%, this would still be at or above the newly assessed trend precluding the need for a policy response.”

That means Evans thinks the chances of a rate cut are remote as well.

Interestingly the Shadow RBA, which has argued against the recent RBA cuts, has also lowered the probability it sees that a rate hike is needed in Australia to “5 per cent compared to 35 per cent a month ago”.

It looks like “do nothing” might be the RBA decision for many months to come.

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