The RBA Shadow Board, made up of industry and academic economists, has warned the RBA against cutting interest rates today in response to last week's surprisingly low inflation figures.
Market expectations of a May interest rate cut jumped from 16 per cent to 53 per cent on 27 April when the Australian Bureau of Statistics released the inflation figures for the March quarter.
The Consumer Price Index rose 1.3 per cent in the March 2016 quarter year-on-year – the lowest inflation figure on record, with consumer prices actually decreasing by 0.2 per cent on the previous quarter.
Given the RBA's target band for inflation is 2 to 3 per cent, the low CPI figure of 1.3 per cent has increased the likelihood of a rate cut today.
At the time of writing, the ASX 30 Day Interbank Cash Rate Futures market was pricing in a 58 per cent chance of a decrease in the official cash rate from 2 per cent to 1.75 per cent.
But the outcome of the Centre for Applied Macroeconomic Analysis RBA Shadow Board's May meeting is that the new inflation figure is "not enough to warrant a rate cut".
The Shadow Board, made up nine industry and academic economists including HSBC chief economist Paul Bloxham, attributed a 63 per cent probability to 2 per cent (ie, no change) being the correct monetary setting.
"The CAMA RBA Shadow Board’s policy preferences have turned mildly more accommodative though there remains a strong consensus for keeping the cash rate on hold, attaching a 63 per cent probability to this being the appropriate policy setting," said the Shadow Board's monthly statement.
"The confidence attached to a required rate cut equals 29 per cent, while the confidence in a required rate hike remains unchanged at 8 per cent."
Over a longer term horizon, the Shadow Board has become more accommodative.
"Six months out, the estimated probability that the cash rate should remain at 2 per cent equals 29 per cent (down one percentage point from April)," the statement said.
"A year out, the Shadow Board members’ confidence that the cash rate should be held steady remained unchanged at 19 per cent."
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