CBA has some interesting research out today using the Mankiw Rule (a version of the Talyor Rule) to judge whether rates have bottomed and any upward forward curve:
Our analysis shows that based on our unemployment and CPI forecasts, the cash rate rising to around 4% over the next 18 months is consistent with the observed relationship between headline CPI, unemployment and the cash rate over the last five years. Lower (higher) inflation and higher (lower) unemployment rate estimates decrease (increase) the cash rate estimate for Mankiw.
Of course, this does not by itself mean that the RBA will raise rates over the next year. The RBA takes many other things into account when setting interest rates. More recently, the high Aussie dollar has become a consideration when setting monetary policy. At the moment, we think the RBA is unlikely to raise rates in 2013. As the graph shows, we think that the cash rate is likely to remain at 3% over the year. But this is interesting food for thought. And it’s worth remembering that the RBA was the first major central bank to lift rates in 2009 from “emergency lows” once it became clear that those low rates were no longer required.
Interesting enough. I’ll simply add that various forms of the Taylor Rule have been suggesting for two years that the US should hike rates.
Oh atheist that I am, I always secretly knew there was a god, the ‘Mankiw Rule’.
I shall follow thee henceforth…
Oh Mankiwoo, oh Mankiwoo
May you ever raise rates for us poor supplicant self funded Pees!
Just from eyeballing that chart, it looks like the cash rate is a good way of forecasting the Mankiw rule, not the other way around! It seems to overshoot and trail the cash rate, so is this just another case of that?
Would be good to see how the Rule is holding (or not) for other nations’ cash rates…?
I hope this will be so!
No, no, no, that will never do. You must appear authoritative. “Make it so”. That should do the trick. Always worked for Patrick Stewart.
Show me a portion of that chart where there has been ZERO variation on the cash rate for a whole year!
Even when your driving down a straight road you need to adjust the wheel a little from time to time.
Also looks to me like the “instep” relationship is out of whack as we speak so one will move to the other and soon.
Atheist too. Go Richard Dawkins!
Off topic google The Popes Dagon priests miter
Cash rates won’t rise much at all, if at all, for quite some time OMHO – we simply have too much debt.
If IRs are raised due to inflation increases, then the rise will hurt debt-holders are cause debt-aversion and debt-deflation…
…and, with the powers that be targeting non-negative GDP figures, the likley end result is Stagnatory.
ie. once the inflation-IR-deflation dance starts really starts its “thing”, IRs are unlikely to change; and that starting point in probably close to an IR of zer, IMHO.
People talking about rate rises don’t think enough about the effects of increasing the burden of holding debt, as well as reducing the rate of the production of new debt…good luck with that!!
My 2c
Given the recent rise in government debt, perhaps instead of raising interest rates if inflation goes up, perhaps the spending power in the economy ought be reduced by a small rise in tax rates, say 0.25% for everyone.
It is time to let fiscal policy share some of the role in regulating price stability when the economy is improving and unemployment is lowish and falling.
What I find most interesting is the State interest rate vs Mankiw.
Why not life rates in bubble States… (NSW and WA)
sickening to hear about msm going on about property price hikes. soon the in laws will start hassling about buying again and how wrong i was to wait. most central banks will continue a policy of zirp. speculators will continue to get bailed out in favour of savers. dont see interest rates going anywhere in a hurry – not in an election year. even if inflation does go up the numbers will likely be manipulated to delay any increase in interest rates. so depressing
Hm… more analytics…as to interest rate… the bet on where it will head is open. The key data to watch are the inflation data and AUD is inadvertently tied to it. However, AUD strength depends on the strength of our export to China mainly. Given that China growth is unlikely to be more than 9% for the forseeable future, AUD is very likely to weaken with or without interest rate cut. This will save Aussie manufacturing industry, but the recovery of this industry will take at least 1 year or 2. Weakened AUD will not be good for inflation given the fact that we are reliant on imported essential goods which turns much faster than industrial goods. Given this scenario.. AUD will weaken in 2013 and inflation will probably pick up. This will prompt RBA not to drop interest rate in 1st half of 2013 and probably be bias on increasing the rate come 2nd half of 2013.
Um… hidden variable bias. Say like bank margins?