‘Shadow RBA board’ favours cash rate hold in August but split over future direction

The self-anointed "shadow RBA board", comprising a panel of academics and economists, is in favour of the cash rate remaining on hold at 3.5% today but says there is uncertainty over its direction in the next 12 months.

The shadow board gave 65% weight to the RBA keeping the interest rate unchanged at 3.5%, while an increase to 3.75% had about 15% weight.

Support for a decrease in the cash rate of 25 basis points or more received a weight of nearly 20%.

The shadow board comprises 10 members including former RBA board member Warwick McKibbin, Paul Bloxham, chief economist at HSBC Bank Australia, and former ANZ chief economist and current Bank of America Merrill Lynch Australia chief economist Saul Eslake.

The finding of the shadow board are presented every month just prior to the official RBA cash rate announcement by The Conversation website in conjunction with the Centre for Applied Macroeconomic Analysis (CAMA).

In its latest update, the shadow board warns that the risks to aggregate demand are finely balanced, with McKibbin and Macquarie University’s Jeffrey Sheen continuing to “see possible demand pressures in the domestic economy that are consistent with a higher interest rate”.

The board is almost evenly split on whether rates will rise or fall over the next 12 months.

Shadow board projections: 

In his commentary HSBC’s Paul Bloxham recommends the RBA keep the cash rate on hold this month, with “evidence from the past month shows that previous cash rate cuts appear to be providing some support for the housing and retail sectors, although some part of this also reflects government payments to compensate for the carbon tax”.

“Overall, the economy appears to be tracking at close to trend. While inflation is low, which allows scope for further cuts, signs of solid demand suggest there is no urgency to provide further stimulus at this stage,” he says.

James Morley, Professor at the University of New South Wales, said that monetary policy remained in a “somewhat accommodative stance, but with little immediate cause for concern about inflationary pressures”.

“Headline inflation is low, although the less volatile measure of underlying inflation is on target, albeit at the bottom end of the 2% to 3% target range.

“This allows an increased weight on keeping the policy rate steady in the near term and slightly increases the possible need for further easing in the event that underlying inflation falls below the target range,” says Morley.

The full shadow board is:

• Shaun Vahey, Professor, RSE, ANU. (non-voting chair)
• Paul Bloxham, Chief Economist (Australia & New Zealand), HSBC Bank Australia Ltd
• Mark Crosby, Dean of the Global MBA Program, Acting Dean of the Global BBA Program, and Professor of Economics, S P Jain Center of Management in Singapore
• Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA
• Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia
• Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology
• Warwick McKibbin, Professor, RSE, ANU, CAMA
• James Morley, Professor, University of New South Wales, CAMA
• Jeffrey Sheen, Professor & Head, Department of Economics, Macquarie University,Editor, The Economic Record, CAMA
• Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy