Steady rates likely

Australia’s interest rates may remain steady for some time.

Two Reserve Bank economists, Richard Finlay and Sebastian Wende, say in a paper just published that their research suggests that ”… long-term inflation expectations are well anchored within the 2 to 3 per cent inflation target range.”

But they admit that in the short run expectations of inflation can be “more volatile.”

The bank watches inflationary expectations closely, when it sets interest rates.

It aims to keep Australia’s annual inflation rate within a 2-3 per cent target range over the course of a business cycle.

It will raise interest rates, if it believes that is necessary, to keep inflation within that band.

However, when the bank’s board met, earlier this month, it decided to keep rates on hold.

The bank’s Governor, Glenn Stevens, will explain that decision today when he releases the minutes of that meeting.

The two economists warned, in their paper, that their conclusions should  “should not be interpreted too precisely due to data limitations and model complexity.”

The bank published their paper as part of a broad debate on interest rates.

It was not meant to be a firm guide to the likely path of interest rates over the next 12 to 18 months.

Home buyers, though, will probably find some comfort in it.

For the technically minded, we note that the two economists calculated inflation risks using inflation forecasts from Consensus Economics and Australian inflation-indexed bond price data.

“Inflation-indexed bond prices are assumed to be non-linear functions of latent factors…”, they said.

They said they had used “a non-linear Kalman filter,”  in their modelling.