Cash rate should remain on hold for now says shadow RBA board

The Reserve Bank of Australia should leave the cash rate unchanged at 3% today, according to 'shadow' RBA board members.

However, some of the nine shadow board members see evidence for lower rates now, and in the future while others believe the cash rate should rise.

The graph below shows that 60% of shadow RBA board preferences are for a 3% cash rate with over 20% preferring a cash rate of 2.75% and 10% a cash rate of 3.25%.

Source: The Conversation

The board is comprised of economists and academics that meet under the banner of the Centre for Applied Macroeconomic Analysis (CAMA) at Australia National University and are asked to rank their preferences for the cash rate before every RBA monthly monetary policy meeting.

The consensus view on interest rates among the shadow board has been for a rate hold in March and April after a February view that the future direction of rates was up.

Shadow board member, HSBC Australia chief economist Paul Bloxham, is in favour of rates remaining on hold despite inflation being low enough to allow the RBA to cut rates further if needed.

He says rates are “already very low and there are signs that monetary policy is working”.

“Lower rates could also risk creating other problems, such as excessive growth in housing prices.

“While a further cut in rates could be needed to support growth at some point, I think there are enough signs that the setting of monetary policy is getting enough traction to warrant leaving the cash rate steady this month,” he says.

Shadow board member Mardi Dungey, professor at the University of Tasmania, says the weakening economy has caused her to lower her expectations of future inflationary pressures and hence alter her longer term projections.

“However, I recommend retaining the current stance in May,” she says.

Former RBA board member Warwick McKibbin and now shadow board member says “cutting interest rates in the face of rising inflation of goods and/or asset prices would undermine monetary credibility and risks unhinging inflationary expectations”.

“Holding interest rates is the least bad option in this complex environment.”

Shadow board member Bob Gregory gave an equal weighting to a rate cut and a rate hold, but did not provide commentary to his views.

The full shadow board is:

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