Shadow board reckons RBA has it about right on interest rates

The Reserve Bank should keep interest rates at 2.5 per cent on Tuesday, a group of experts says.

The RBA Shadow Board, a project based at the Australian National University's Crawford School of Public Policy, brings together specialists from universities and banks to vote on whether the RBA's cash rate should be changed.

Shadow board chairman Timo Henckel said members were 73 per cent confident current economic settings were correct and did not need to be changed this week.

He said a ''mixed bag'' of economic news both in Australia and overseas had influenced their recent findings.

Dr Henckel said the Australian dollar had depreciated and there had been low interest rates for some time, while unemployment was increasing and mining investments had been falling. But he said the one factor the shadow board members had focused on most intently was the labour market, which was showing some weakness.

''The question now is: is the 6 per cent unemployment rate going to be the peak and are the stimulatory factors of the depreciated Australian dollar and the low interest rates ultimately going to feed through and reduce the unemployment rate again?'' he said.


''Or is there something else in the making there that shows some fundamental underlying weakness in the Australian economy that means the unemployment rate will remain this high or even rise higher?''

Dr Henckel said it was unlikely the RBA would reduce interest rates further in coming months.

''I think the RBA would allow the Australian economy to weaken a fair bit more before it would cut interest rates further, but it's not a zero-probability event,'' he said.

Dr Henckel said the shadow board's findings were usually similar to the RBA's but the shadow board also told observers how certain they were of their decisions.

''What that does is capture [shadow board members'] confidence about what they think the appropriate interest rate setting is and give an idea of where they think the risks lie and how big they think those risks are, on the upside or the down side,'' he said.

He said the board aimed to promote debate over monetary policy in Australia and scrutinise the RBA.

Two ANU professors on the shadow board, Bob Gregory and Warwick McKibbin, have both served on the RBA board.