Shadow RBA Board in little doubt that cash rate should rise

The RBA Shadow Board at The Australian National University (ANU) has voted in favour of a fifth successive rise in interest rates for September.

The Shadow Board’s conviction that the cash rate should increase by a further 50 basis percentage points comes as inflation remains well above the RBA’s target band of between two to three per cent.

The Shadow Board is 89 per cent confident the overnight interest rate should be raised above the current setting of 1.85 per cent, while attaching an 11 per cent probability that keeping the rate on hold this round is the appropriate policy.

Chair of ANU RBA Shadow Board Dr Timo Henckel said there are a number of factors behind recommending another increase in interest rates.

“Other indicators also suggest that inflation will remain elevated for a while: a historically high capacity utilisation rate, global supply chain constraints, and high energy and food prices,” Dr Henckel said.

“The impact of fiscal policy will become much clearer in a couple of months, after the government announces its first budget. Some significant structural policies may also come out of the recent Jobs and Skills Summit.

“Consequently, the RBA Shadow Board strongly advocates in favour of further interest rate increases.”

Australia’s seasonally adjusted unemployment rate dropped to a new record low of 3.4 per cent in July, while youth unemployment also dropped from 7.9 per cent to 7.0 per cent.

Total employment fell by 40,900. However, the labour participation rate, after reaching a historic high of 66.8 per cent in June, fell to 66.4 per cent, explaining why this drop did not raise the unemployment statistic.

Dr Henckel said there is also a puzzling question on why wages are not keeping pace with inflation.

“There is growing concern among workers, unions, policy makers and even some businesses that real wages need to rise, along with productivity,” he said.

“Other labour market indicators such as underemployment, job vacancies and job advertisements remain strong, painting a favourable picture overall of the Australian labour market.”

The Australian housing market recently experienced its biggest monthly decline in several decades, according to CoreLogic, as higher interest rates and the prospect of further increases, are weighing on demand, particularly for first home buyers.

Dr Henckel said there is also continued uncertainty around the global economic outlook, which may impact consumer confidence.

Read the Shadow RBA Board’s full commentary online.