Shadow RBA says hold with tightening bias

From the Shadow:


Financial markets are pricing in a 75 per cent chance of a rate cut when the RBA meets next week, which would be its second such move this year. However, the CAMA RBA Shadow Board advises against this. The central dilemma for the RBA persists: spur growth with loose monetary policy and risk exaggerated asset prices that lead to a misallocation of capital and costly adjustment in the future, or hold the line on monetary policy and risk an imminent weakening of aggregate demand.

The CAMA RBA Shadow Board on balance prefers to hold firm but still considers it necessary that the cash rate is lifted in 6-12 months. In particular, the Shadow Board recommends with confidence that the cash rate be held at its current level of 2.25%; the Board attaches a 64% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 16%, while the confidence in a required rate hike stands at 19%.

Australia’s jobless rate, according to the Australian Bureau of Statistics, edged down to 6.3% in February, due both to an increase in employment and a marginal decline in the participation rate.

There are no signs that wage growth is wakening from its torpor, making it unlikely that consumer spending will pick up significantly. The Aussie dollar continued to slide and now fetches about 75 US¢. As yields on Australian 10-year government bonds are now down to 2.35 percent, barely 40 basis points higher than for US Treasuries, global investors will search for yield elsewhere. A further decline of the Aussie dollar may well be on the cards.

Sydney’s inflated housing market remains cause for concern, as prices rose 3.3% month-on-month in March alone. The local stock market is also performing strongly, the ASX200 closing at 5900 just before Easter.

Global weakness and uncertainty keep battering the domestic economy. European growth remains soft while Germany is searching for solutions to the Greek debt crisis. Brazil is faltering and Russia, suffering from weak energy prices and political scandals, is experiencing a dramatic slowdown. China will aim for an annual growth rate of 7%, in line with previous announcements, while the US economy continues to expand modestly. The Federal Reserve Bank’s rhetoric points to a measured increase in the cash rate in the near future.

Confidence measures continue to be mixed. Consumer confidence slipped marginally, with the Westpac Consumer Sentiment Index coming in at 99.47 this month (100.7 in the previous month). Capacity utilization edged up from 79.94% in January to 80.42% the following month. The manufacturing PMI increased to 46.29 in March from 45.51 in February, while the services PMI advanced significantly, from 49.50 index points in January to 51.70 index points in February, the highest in more than a year. At the same time business confidence, as reported by the National Australia Bank, decreased to 0, the lowest in more than a year.

The Shadow Board’s confidence that the cash rate should remain at its current level of 2.25% is unchanged at 64%. There is far less confidence (16%, up from 14% in March) that another rate cut is appropriate whereas the Shadow Board considers it more likely (19%, down from 22% in March) that a rate increase, to 2.5% or higher, is the appropriate policy decision for this month.

The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2.25% equals 31% (unchanged from March). The estimated need for an interest rate increase lies at 53% (down from 56%), while the need for a rate decrease is estimated at 16% (up from 13%). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 63% (down one percentage point), in a required cash rate decrease 16% (up four percentage points) and in a required hold of the cash rate 24% (down two percentage points).

All care and no responsibility in shadowland where Australia exports unicorns not iron ore.


  1. Iron ore has fallen by a quarter since the last meeting, and we’re at the point where each incremental decline is having a massive impact on profitability. What world are they living in where a country can tighten into the most severe mining bust in a century?

    • What world are you living in where a country can loosen into the most severe speculative mal-investment bubble in a century?

      • One where there are plenty of avenues to hit the narrow area of concern aside from the cash rate. Moreover, the point of ‘loosening’ is actually devaluation, which happens regardless of whether the RBA loosens or not. If they don’t, we devalue the Greek way, if they do, we devalue the Norwegian way.

      • “One where there are plenty of avenues to hit the narrow area of concern aside from the cash rate”
        …One where these “plenty of avenues” remain blocked, while the bubble grows.

      • Indeed it does. Doesn’t mean the RBA should hike interest rates though, it means it should lean aggressively on politicians to hammer property speculation. Driving up your nominal exchange rate with tight monetary policy at this point in the super-cycle, when there are plenty of other policy options available to address specific problems, is what we might call suboptimal.

      • The Patrician

        Choosing to cut and hold at all time record lows for the last 18 months without MP, without FIRB enforcement and with NG remaining on existing dwellings, is what we might call wilfully negligent.

      • SweeperMEMBER

        “Driving up your nominal exchange rate with tight monetary policy at this point in the super-cycle, when there are plenty of other policy options available to address specific problems, is what we might call suboptimal”

        That’s true. But in reality none of the 1st best options are on the table because the Treasurer doesn’t believe there is a bubble At some point (probably now) the RBA has to weigh up the risks of 1) allowing this bubble to continue – which means further lending/borrowing against clear bubble valuations and 2) even softer aggregate demand.

      • Cutting interest rates to boost consumption, meaning pretty much imports, in the face of declining exports sounds like insanity to me.
        We don’t just have a bubble in domestic RE.
        As per my post last week we have a bubble in every damned thing from Houses to Coffee bloody machines (yes I have a fixation), to Tattoos, to alcohol, to drugs, developing in the industrial RE market, to imports of expensive cars and SUV’s. etc etc etc
        Everything you look at is one giant bubble!

        Therefore reduced IR’s are the last thing we need. Even with teh proposed ‘macroprudential’ lower IR’s are just going to transfer the flow of funds somewhere else. We will continue building bubbles in every danmend thing EXCEPT the future of our children!

      • MJV and Patrician: Guys its both. Its both the most severe speculative mal-investment bubble in a century, and the most severe mining bust in a century. That’s the problem, and the two camps talk across each other like the other problem just doesn’t exist.

        The bubble could probably be dealt with by regulation and tax reform, but we have idiots at the wheel. That’s hardly a reason to stop advocating good policy. Look how far we’ve come on super concessions.

    • ‘What world are they living in where a country can tighten into the most severe mining bust in a century?’

      Bust? Fork me! I’d love to see Average City Joe who’s happy to pay in most cases $300K more for a place than he would have 18 months ago, during the good times. Clearly the Chicken Littles at the RBA have the upper hand.

    • No cut today,agree….we need a bwanker with a slow hand and an easy touch,.. just like the pointer sisters song….gently gently Glenny just a little bit……oh u naughty boy look at the mess you’re making….