Cash rate should stay on hold for the next year

The official cash rate should remain at a historic low of 0.1 per cent for at least one year, according to The Australian National University’s RBA Shadow Board.

In its latest vote, the Shadow Board attaches a 95 per cent probability that an overnight cash rate of 0.1 per cent is the right setting, and only a five per cent probability that interest rates should rise.

This is down slightly from the Board’s May vote, which attributed a 98 per cent probability that 0.1 per cent was the correct setting. 

The Board has a 62 per cent conviction that 0.1 per cent rates are the right setting in 12 months’ time.

There is a strong conviction among the Board – 89 per cent – that rates should rise above 0.1 per cent in three years’ time.

Shadow RBA Chair, Dr Timo Henckel, said the Board’s conviction to keep the overnight interest at 0.1 per cent has eased slightly but “remains very strong”.

“The lockdown in Victoria serves as a potent reminder that COVID-19 can affect the domestic economy unexpectedly at any time, at least until a large proportion of the Australian population is vaccinated,” Dr Henckel said.

“At the same time, the recent economic recovery has been gathering pace, leading to favourable outcomes in the labour market in particular.

“The new Federal Budget reflects the overall strength of the Australian economy, pouring an additional $104 billion into Treasury’s coffers between now and 2024-25, relative to the official forecasts released six months ago.

“This means that, after taking all new spending into account, the underlying deficit is projected to equal $161 billion in 2020-21, $37 billion less than assumed in last December’s Mid-Year Economic and Fiscal Outlook.

“However, further fiscal and monetary stimulus is needed for the foreseeable future and so large budget deficits and low interest rates are likely to persist for years.”

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.