Keep cash rate on hold on Melbourne Cup Day but easing bias remains: shadow RBA board

The Reserve Bank should leave the cash rate on hold at 3.25% today, says the self-anointed "shadow RBA board", though the decision was far from unanimous, with a rate hold getting a 60% weighting from members.

The board comprises a panel of noted academics and economists and gives its views on the monthly cash rate decision as part of a widely reported exercise by the Australian National University’s Centre for Applied Macroeconomic Analysis.

Among those leaning towards a cash rate cut today is HSBC Australia chief economist Paul Bloxham, who says that while the RBA board could wait for further evidence about the extent to which the current below neutral interest rates are supporting demand in the economy, there is little risk of high inflation, meaning it “may be prudent to cut rates a bit further this month”.

Shadow board member James Morley, professor at the University of New South Wales, disagrees, saying recent cuts in the policy rate mean “monetary policy is loose, with the implicit real interest rate well below its neutral level”.

"Thus, with low inflation and an uptick in the unemployment rate, the current stance is appropriate for the short term, with a slight easing bias in case the employment situation deteriorates further," Morley says.

Also in favour of a rate hold today is Warwick McKibbin, professor of economics at ANU and a former RBA board member under John Howard. He says “no change in interest rates domestically would be prudent especially given ambiguous signals from various government ministers that the fiscal surplus may not be realised this financial year”.

Looking beyond November, the shadow board says the most preferred setting for the cash rate is 25 basis points down to 3% within six months, with only a 30% risk that rates should have to fall lower than that.

However, two shadow board members, ANU professor Bob Gregory and Bank of America chief economist Saul Eslake (formerly chief economist at ANZ), believe rates could be even lower in 12 months, backing a range of 2.5% to 2.75%

The full shadow board is:

• Shaun Vahey, Professor, RSE, ANU. (non-voting chair)
• Paul Bloxham, Chief Economist (Australia & New Zealand), HSBC Bank Australia Ltd
• Mark Crosby, Dean of the Global MBA Program, Acting Dean of the Global BBA Program, and Professor of Economics, S P Jain Center of Management in Singapore
• Mardi Dungey, Professor, University of Tasmania, CFAP University of Cambridge, CAMA
• Saul Eslake, Chief Economist, Bank of America Merrill Lynch Australia
• Bob Gregory, Professor Emeritus, RSE, ANU, Professorial Fellow, Centre for Strategic Economic Studies, Victoria University, Adjunct Professor, School of Economics & Finance, Queensland University of Technology
• Warwick McKibbin, Professor, RSE, ANU, CAMA
• James Morley, Professor, University of New South Wales, CAMA
• Jeffrey Sheen, Professor & Head, Department of Economics, Macquarie University,Editor, The Economic Record, CAMA
• Mark Thirlwell, Director, International Economy Program, Lowy Institute for International Policy