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MNI ANALYSIS: RBA's MARTIN Knows Cash Rate Story, Won't Tell

MNI (London)
--RBA's Macro Model Helping Policymakers Shape Longer-Term Thinking
By Sophia Rodrigues
     SYDNEY (MNI) - If you know the Reserve Bank of Australia, it is likely you
also know its location: Martin Place in Sydney. But very few know the RBA's
connection with another Martin -- Macroeconomic Relationships for Targeting
Inflation, a full-system macroeconomic model designed by the central bank --
also, perhaps unsurprisingly, known as MARTIN. 
     MARTIN has the potential to tell us when the RBA's cash rate could reach
the neutral level and thus the timing of the first rate hike of the current
cycle. It is unlikely the RBA will publish its extended forecast horizon but the
quarterly Statement on Monetary Policy, due Friday, could reveal some of
MARTIN's work and possibly some insight into the period after June 2020 when the
forecasts end.
     Governor Philip Lowe hinted at additional details regarding upcoming policy
in his speech Tuesday when he said, "Those of you who are close readers of this
document will notice some changes in this issue, as we seek to make the report
more thematic."
     One of the most significant uses of the model is to extend forecasts and
analyze the outlook beyond the two-to-three year published forecast horizon. 
     If published, it will be the first time the RBA's forecasts will tell the
complete monetary policy story, although publication still seems unlikely.
     --MARTIN'S HISTORY
     The RBA developed the model in response to a review in late 2014 of its
forecasting, put together by Adrian Pagan, professor at the University of Sydney
and David Wilcox, a researcher at the Federal Reserve. 
     The review recommended the RBA develop and analyze 'full-system' or
'general equilibrium' models of the economy -- that is, models which account for
the simultaneous responses of a large number of key variables to unexpected
developments (or shocks). The review recommended supplementing the Bank's
existing models with one that incorporates its separate single equation
estimates for a range of key variables into a system of equations.
     MARTIN was developed in 2016 and has been in use since the middle of 2017.
     The program can be used for various purposes, including scenario-analysis,
to produce its own model-based forecasts, with and without imposing assumptions
and additional judgement, and to understand the staff forecasts.
     But one of its most noteworthy uses is to extend the horizon of the
forecast -- another of the review's key recommendations. 
     --MARTIN KNOWS
     The RBA could use this, at least for internal discussion, to map out a
plausible path that would take the macroeconomy back to full employment, keep
inflation within the target range, and return the cash rate to its neutral
level.
     Currently, the RBA's forecasts show inflation within the target band, but
the unemployment rate still above the current estimate of full employment and
the cash rate at least 200bps below the neutral rate.
     As the inflation forecast moves closer to the mid-point of the target band,
there is a lot of interest in when the RBA expects the neutral cash rate level
will be reached. That end point would determine when the starting point of the
next rate cycle would come.
     MARTIN knows the answers to all the above questions, but won't tell us --
not yet at least.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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