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Tuesday March 06, 2012

Shadow RBA flags interest rate uncertainty

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There is considerable doubt the Reserve Bank has got its current economic settings right and it should consider cutting interest rates by at least 25 basis points, according to the Shadow Reserve Bank (Shadow RBA) board.

The Shadow RBA has analysed the current economic conditions ahead of today's Reserve Bank board meeting. While a small majority of the Shadow RBA board thought the current settings were 'about right', around 30 per cent of board members thought the economy needed the boost of a strong interest rate cut.

The Shadow RBA is a project run by the Centre for Applied Macroeconomic Analysis in the ANU College of Business and Economics. Its members analyse prevailing economic conditions ahead of RBA board meetings and give their own thoughts and analysis of what the RBA could, and should, do.

Members of the Shadow RBA include ANU economists Professor Warwick McKibbin and Professor Bob Gregory, as well as Mark Thirwell of the Lowy Institute, Paul Bloxham of HSBC Bank, Professor Mark Crosby of the SP Jain Centre of Management in Singapore, Professor Mardi Dungey of the University of Tasmania, Saul Eslake of the Grattan Institute, Professor James Morley of the University of New South Wales and Professor Jeffrey Sheen of Macquarie University.

The Shadow RBA board is led by Professor Shaun Vahey of ANU, who said that the economists involved in the project suggested there was considerable doubt that the RBA had its economic settings right.

"The highest weight - around 60 per cent of Shadow RBA members - thought that the RBA setting for February of 4.25 was 'about right'," he said.

"But the Shadow RBA also reported a roughly 30 per cent probability that the RBA should cut interest rates by at least 25 basis points, while only a 10 per cent probability that they should rise by 25 basis points."

Under the Shadow RBA project, the members give probabilistic assessments of the appropriate target interest rate for each Reserve Bank announcement round. Members are also invited to make comment on what they see as the prevailing economic factors influencing their decision. The outcomes of their assessments, and their comments, are published on the Shadow RBA website on the Monday before each RBA board decision.

For more details on the project:

Source: The Australian National University

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