Cash rate must stay at record low for now: Shadow RBA

With economic uncertainty still high due to the COVID-19 pandemic and the strong likelihood of recession, The Australian National University’s RBA Shadow Board says the cash rate should stay on hold for the coming months.

The Shadow Board is also urging the RBA to continue with, and intensify, its guidance about future monetary policy.

Their statement comes ahead of Tuesday’s official cash rate announcement.

The Shadow Board’s conviction the cash rate should remain at the historic low of 0.25% remains very strong, at 94 per cent.

In comparison, their confidence in a rate cut is just 6 per cent, with the Board having zero confidence that a rate hike is appropriate.

RBA Shadow Board Chair, Dr Timo Henckel, says the RBA should be directing much of its attention to the time after the immediate crisis has passed.

“The COVID-19 pandemic and the associated policy response make reliance on standard economic indicators, which are severely lagging, even more problematic than usual,” Dr Henckel said.

“With overnight interest rates virtually at the zero lower bound, monetary policy needs to pull other arrows out of its quiver.

“Options include pushing the three-year government bond rate down to the same level as the overnight rate for the foreseeable future of 0.25 per cent. Another is the $90 billion three-year funding facility to help banks continue to lend to business.

“For the RBA, this means they need to be looking at the many months, or years, in which the economy will be recovering from the likely recession.

“The RBA is sending the right signals, but it needs to lay out future policy in some detail, including the path of interest rates.

“The ANU Shadow Board’s practice of giving six-month and 12-month policy recommendations with confidence bands could be useful in this.”

The Shadow Board’s six-month view shows a 91 per cent probability that keeping rates on hold will be the right move.

Overseas, and the International Monetary Fund is projecting that the global economy will contact by 3 per cent in 2020 – much worse than during the 2008-2009 global financial crisis.

“But estimates vary widely. This not only reflects uncertainty about how the economy will respond, but also whether the coronavirus can be contained and a second wave prevented,” Dr Henckel said.

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy.

The Board brings together nine of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behaviour.

Read the RBA Shadow Board’s latest commentary here.