As COVID cases rise, rates should stay low

With a surge in coronavirus cases in Victoria and other states, there is a strong reason to keep the official cash rate on hold, according to The Australian National University’s Shadow RBA.

For a fourth month in a row, the ANU RBA Shadow Board’s probabilities regarding a change to the official cash rate change remain the same.

In its latest vote, the Board attaches a 94 per cent probability the overnight interest rate should remain at the historically low rate of 0.25%.

In contrast, the Board attaches a six per cent probability that a final rate cut, to zero per cent, is appropriate and a zero per cent probability that a rate rise, to 0.5 per cent or higher, is appropriate.

Shadow Board member Dr Timo Henckel said by international standards, Australia’s experience with COVID-19 remains favourable.

“But the current outbreak in Victoria is a reminder that the economy is a long way from returning to normal,” Dr Henckel said.

“Uncertainty about the progression of the coronavirus and about the domestic economy remains very high.”

Key domestic factors impacting Australia’s economic outlook include inflation, consumer confidence and the state of the labour market, the Shadow Board noted.

“There are also significant questions about the Government’s fiscal stimulus programs,” Dr Henckel said.

“Fiscal policy, through the JobKeeper and JobSeeker programs, has averted a deeper recession but there is growing concern the stimulus programs, scheduled to end in late September, will be phased out too soon.

“A swift withdrawal of income support, and thus aggregate demand, is likely to weaken the economy further, leading to higher unemployment rates, less consumption spending, and falling inflation.”

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.